Nike Inc (NKE) 2005 Q1 法說會逐字稿

Welcome to the Nike first quarter 2005 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, Vice President of Investor Relations. Ms. Catlett, please go ahead.

Good morning everyone. We're pleased you are joining us this morning to discuss Nike's fiscal 2005 first quarter results. We're reporting to you today from the Oregon Convention Center where we will host our annual meeting of shareholders later this morning. For those of you who need to reference our release, you'll find it on our website, www.Nikebiz.com. You 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, President of the Nike Brand, and Don Blair, Nike's 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, I would like to 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 orders that are not necessarily indicative of total revenues for subsequent periods due to cancellations and the mix of futures in that once order which may vary significantly from quarter to quarter.

In addition, it is important 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 conference call we may discuss non-GAAP financial measures. The 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 statistical information which is also available on our site. Now here's Don.

Our business momentum continued in the first quarter of fiscal 2005 with virtually every component of our global business portfolio performed well in the quarter. Our revenues grew 18 percent for the quarter to a record $3.6 billion. Changes in foreign currency exchange rates accounted for about 3 points of gross, while the acquisition of Converse added another 4 points to consolidated revenue growth for the quarter.

The impact of the Starter acquisition on our quarterly results was negligible. We also delivered record profits in the first quarter as our diluted earnings per share were $1.21, up 23 percent versus fiscal 2004. The acquisition of Converse accounted for about 9 points of our consolidated earnings per share growth. For the quarter, our consolidated gross margin was 44.5 percent, up 1.5 points versus last year's first quarter. Currency changes accounted for about 1.3 points of the improvement.

As we expected our SG&A spending was fairly heavy in the quarter, largely as a result of demand creation investments around the summer's global sporting events. Futures orders for the next five months grew about 10 percent in real dollar terms. Excluding the impact of currency changes, futures orders increased 9.2 percent, essentially in line with the growth we reported last quarter.

In the first quarter of fiscal 2005 we also continued to manage our shareholders' capital effectively. Our return on invested capital was 22 percent, and we delivered $308 million of free cash flow from operations. I should note that since free cash flow from operations is a non-GAAP term, we posted the reconciliation on our website. We also delivered a lot of cash to shareholders during the quarter. We repurchased $155 million of our own stock, and we paid out $53 million in dividends. Those are the headlines. Now let's dig into some of the details.

In our European region, which includes the Middle East and Africa, revenues grew 14 percent in Q1, with about 5 points of the growth coming from more favorable exchange rates. Footwear revenues grew 12 percent, apparel revenues advanced 20 percent, and equipment revenues were up 7 percent. Revenue for the quarter was somewhat better than we expected as some orders that would normally have been delivered in September moved into August.

Footwear revenue growth for the quarter benefited from strong sales in the UK, Italy, and the emerging markets of Central Europe, Turkey, Russia and Greece, partially offset by weaker results in France, Germany and Iberia.

As a result of the timing issues I mentioned earlier, we're not ready to call a change in our footwear revenue trend yet from the low to mid-single-digit constant dollar growth rate we have seen over the last few quarters.

European apparel sales also benefited from the summer's sporting events as well as new kit launches for Arsenal and Manchester United. Our gross margins in Europe expanded 180 basis points for the quarter, accounting for 60 basis points of our consolidated margin improvement. As we indicated earlier, in fiscal 2005 we will be investing in the product value equation in Europe, partially offsetting the gross margin benefits of better foreign exchange rates.

Reported first quarter pretax income for the European region was $246 million, an increase of 21 percent versus fiscal 2004. In the Asia-Pacific region revenues increased 17 percent in the first quarter. About 5 points of the increase came from stronger currencies in the region. Footwear reported 8 percent gross, while apparel grew 31 percent, and equipment advanced 21 percent. Revenues in China nearly doubled, while Japan posted another quarter of double-digit growth.

For the quarter, Asia-Pacific gross margin advanced 230 basis points accounting for 30 basis points of the consolidated gross margin improvement. Reported pretax income for the quarter fell 17 percent to $63 million, as SG&A spending increased over 50 percent as we had planned. Investments in demand creation for the Olympics and China, as well as the implementation of new supply chain systems in Japan and Southeast Asia, drove the year-over-year increase in SG&A.

The Americas region performed pretty much as expected in the first quarter. Local currency revenues grew 10 percent in the quarter, but weaker currencies in the region reduced reported revenue growth to 7 percent. Gross margin fell 170 basis points in the quarter, reducing Nike, Inc. consolidated gross margins by about 10 basis points. Lower gross margins, combined with heavy demand creation investments, drove reported pretax income to $21 million for the quarter, down 15 percent versus the prior year.

In the U.S. we began fiscal 2005 with a banner quarter as revenues advanced over 12 percent driven by strong growth across a number of wholesale accounts. Footwear revenues grew 12 percent, apparel increased 13 percent, and equipment grew 11 percent. Comparable store sales for Nike Town stores grew 9 percent in the first quarter, reflecting the strength of the brand. And U.S. futures orders rose over 11 percent versus the year ago period.

Gross margins in the U.S. advanced 50 basis points for the quarter, driving 20 basis points of our consolidated gross margin improvement. Most of the improvement came from footwear through a combination of higher in-line margins and fewer, more profitable closeouts. Higher revenues and gross margins were partially offset by heavier demand creation investments in the U.S., bringing pretax reported profits to $322 million, up 10 percent versus last year's quarter. Operating overhead in the U.S. region grew less than 3 percent.

For the quarter revenues from our other businesses grew 64 percent to $435 million. The acquisition of Converse accounted for about three-quarters of that growth. Cole Haan had another stellar quarter as revenues advanced 30 percent. Our other businesses earned $40 million or pretax profit, driven primarily by the acquisition of Converse and robust profit growth at Cole Haan.

Consolidated SG&A spending for Nike, Inc. grew 23 percent in the quarter, driven by a 44 percent increase in demand creation and an 11 percent increase in operating overhead. For total SG&A, changes in exchange rates accounted for 2 points of that growth and the addition Of converse accounted for about 3 points of the increase.

The increase in demand creation spending was the expected results of our investments in advertising behind the summer's global sport events, higher endorsement expenses, and retail development programs. In addition to the impacts of foreign exchange in the Converse acquisition, the increase in operating overhead reflected investments in Nike retail stores and in Asia, including the supply chain systems implementation in Japan and Southeast Asia. Other expense for the first quarter was $2 million, down $24 million in the prior year.

The largest factor in the improvement was lower foreign currency losses, primarily from hedging. The net effect of the improvement in foreign currency losses and the favorable translation of foreign currency denominated profits was $22 million of additional pretax income for the quarter. Our effective tax rate for the quarter was 35.4 percent, consistent with our current estimate for the full year. This rate is 60 basis points above the rate for all of last year due largely to the expiration of R&D tax credit legislation.

The strength of our balance sheet continued to be a highlight at the end of the first quarter as well. Our balance of cash, cash equivalents and short-term investments totaled $1.3 billion, well in excess of our debt balances. As of August 31, worldwide inventories were 11 percent higher than a year ago. The acquisition of Converse and currency changes together accounted for about 7 points of growth. Inventory in the U.S. fell 9 percent.

At the end of the quarter accounts receivable were six percent higher than the prior year. Stronger foreign currencies and the acquisition of Converse together accounted for all of that growth.

Our expectations for fiscal 2005 remain broadly consistent with the point of view we discussed last quarter. We're targeting high single digit revenue growth for the full year as we have now passed the anniversary of the Converse acquisition, and we will begin to compare again stronger numbers in the second half of fiscal 2004.

As we have indicated earlier, we expect that better foreign hedge rates will enable us to be more competitive in Europe and Asia, as well as grow our overall gross margin percentage for the year. The increase in gross margin should be slightly greater in the second and third quarters when the year-over-year improvement in hedge rates will be most significant. The smallest year-over-year gross margin growth should be in Q4, as we were already experiencing better foreign exchange rates in the fourth quarter of fiscal 2004.

We're now planning SG&A spending for fiscal 2005 in the same range as last year, which was just over 30 percent of revenue. The high level of spending growth in the first quarter will be largely offset in the fourth quarter due to the timing of demand creation spending.

So in summary we're very pleased with the quarter and feel we're in great position to deliver on our goals for the year. So with that I will turn the floor over to Mr. Mark Parker, President of the Nike Brand.

Thanks, John, and good morning everyone. For the past year I've been talking to you about the Nike Speed initiative and the impact we expected it would have on our business and our brand.

Now that we're winding down on the summer of Speed and readying new campaigns this fall, I would like to take a quick look back on a few highlights. We take the concept of Speed across sports and regions and span athletic events from Euro Champs to Copa America, the Tour de France, the Olympics, and most recently the U.S. Open Tennis Tournament.

It was the largest global integrated brand initiative in our history, involving many of our top athletes, including Lance Armstrong, Serena Williams, Olympic gold medalists like Hicham El Guerrouj and Justin Gatlin just to name a few. And it featured our a most innovative footwear like the Zoom Miler and the Monster Fly, advanced apparel like the Swiss Spin and Swiss Suit, and designed for it equipment like the MP3 Run.

By almost any metric the campaign was a tremendous success and has given the brand additional heat and the business strong momentum as we move further into the fiscal year. Olympic years have always represented an excellent international platform and a positive boost for our business. Since the Sydney games in 2000 Nike revenues have grown 35 percent.

But our approach to the summer of 2004 was different from years past. Instead of focusing on one one three-week period, we created a brand initiative that spanned the entire summer. Instead of focusing on one international competition, we wove the common theme of speed through major sporting events in five continents.

And in addition to creating cutting-edge performance products for world-class athletes, we brought to market both performance and performance inspired training and activewear linked with these international sporting events. For example, when El Guerrouj captured the gold in the 1,500 and 5,000 meter races in the Nike Zoom Miler, not only was the innovative Spike available in running specialty shops for competitive runners, we also brought Air Zoom Miler training shoes and Street Miler active life shoes to broader retail distribution.

We have seen solid sell-through on the Air Zoom Miler and Street Miler during both -- for both the men and women. It is an example of the synergy we can create as we deliver solid performance product innovation while driving our active life business.

From an apparel standpoint, Nike's Swift technology made an impressive showing in a number of sports, including gold medal performances in track and field, swimming, cycling and rowing. But again the bigger story here is what we are bringing to apparel and to retail that delivers the benefits of Swift technology along with a distinctive aesthetic to a broader market. As Don reported, apparel revenues in real dollars grew by 17 percent in quarter 1 compared to quarter 1 last year, results driven in part by the summer of Speed that not only fueled the business but also brand.

You could not have missed Serena Williams or her Nike designed outfit at the U.S. Open featuring performance denim and cooling sphere and mesh design. In fact, Maria Sharapova, Laten Hewlett (ph) and Roger Fetter also wore Nike's most innovative tennis products. And the buzz generated on the court translated into strong sales at retail.

Through Speed and other initiatives we're aligning better than ever behind our key athletes, team and federation partnerships to capitalize on opportunities. By creating comprehensive brand and product plans for our top partnerships, we're investing in the brand and driving solid business growth. We're seeing growth and strength in our core footwear categories such as running, basketball, soccer and training, so our foundation is strong.

And I'm very pleased to see a more balanced portfolio with healthy sell-throughs across our sport and active life categories. In fact, we are seeing strong results across all major channels of distribution for back to school.

As we expected female consumers have embraced the new shops for her concept and product. NPD reported in July that the Nike Shox Inertia (ph) was a top training shoe in the industry, and the Bella running shoe and Allegro walking shoe have also -- have very strong sell-throughs.

Nike impact footwear is another back to school success story, popular with consumers that at a more accessible price point. And then finally in footwear the Jordan brand continues to be strong in the sport, active and retro sides of the business.

On the apparel side, branded athletic apparel had some strong momentum. We're seeing rapidly increasing acceptance by consumers for performance fabrics like those used in the Nike Pro Line, as well as dry fit technology in Nike Golf apparel.

Consumers also continue to embrace our Sphere technology with innovative products such as the woman's Sphere dry woven jacket and Sphere dry woven pants, being two products in particularly high demand this quarter. These and other products contributed to an overall robust back to school season for Nike that is driving healthy futures orders for spring '05.

In addition, I see continued momentum in the higher average price per pair trend. In the coming months we are capitalized on the brand heat we generated during the summer of Speed. In the U.S. we are underway with our fall football brand initiatives that centers on Michael Vick and the much anticipated Air Zoom Vick II that we deliver to the market next week.

On the college front, roughly 80 percent of the top 25 college programs in the country take to the field each Saturday in Nike Team Sports licensed apparel. And we continue to innovate with uniforms that are 25 percent lighter with stronger fabrications and improved ventilation.

In Europe, soccer takes to pitch once again in the European leagues as they heat up this fall. Nike continues to build brand equity and team sports apparel sales with the world's top clubs, including Manchester United, Aventis and Arsenal. The launch of the integrated Total 90 apparel collection is driving strong sales and retail impact in Europe and around the world.

Before I turn things over to Charlie Denson, I would like to touch briefly on the phenomenal worldwide reaction to the Wear Yellow campaign featuring the Live Strong Yellow wrist bands. In late May Nike set out to honor Lance Armstrong, not only a great athlete but at the time going for his sixth win of the Tour de France. But also he is an inspiration to millions who have overcome adversity. As a celebration and a tribute to Lance, Nike donated 1 million to the Lance Armstrong Foundation and coordinated the efforts to raise additional $5 million through the sale of $1 yellow wrist bands.

The wrist bands were stamped with Lance's mantra, Live Strong, now a global icon of support for those living with cancer. We're thrilled to report that over 12 million wrist bands have been sold to date. Because of these fund-raising efforts, the Lance Armstrong Foundation continues in their pursuit of helping cancer survivors and their families live strong. The yellow wrist band has become a cultural phenomenon generating tremendous public awareness for Lance's foundation and the excellent work it does. We're very proud to be involved with Lance, both on a professional and a personal level.

With that I will turn over to Charlie Denson.

Thanks, Mark. And thank you all for joining us today. As you have heard, we have reported a strong first quarter performance. Not only as a great start for our fiscal year, it is traditionally one of our larger quarters and critical in delivering the targeted results we have talked about on an annual basis.

From my prospective today's results illustrated three vital components to our future success. First, it reflects an ability to manage our portfolio, aligning and driving key components of our business, balancing our strengths and weaknesses in order to deliver consistent revenue and earnings growth over the long term.

Second, the things Mark has just reviewed, our ability to execute brand building initiatives and brand management strategy in a very diverse and complex global marketplace. And third, our continued investment in both our core infrastructure and our future growth opportunities.

For the last nine months, we pointed toward what we have affectionately called our Summer of Sports, speaking to both our global and regional plans for creating the connectivity between the brand and our consumers. We've talked about aligning all of our tools to achieve optimal results, and now we're seeing the benefits of plans well executed. Overall, the portfolio performed very well.

Our USA business is a great example of that alignment really paying off. From products, marketing, retail and sales the U.S. business is now hitting on all cylinders. You see it in the numbers we're reporting, but you feel from the energy and excitement consumers and customers are expressing for our brand and indicated in our futures numbers.

Europe was another big benefactor of this summer's sporting events with a very strong first quarter performance. We're still seeing some softness overall in the Western European markets and our features orders primarily from France and Germany. We continually -- we continue to invest aggressively in Asia and feel very good about our growth and brand position throughout the Asia-Pacific region. And our business in South America remains stable. We can also talk about diversity and the increasing contribution by other parts of the portfolio like Converse and Cole Haan, with both companies turning in very strong quarterly performances.

Nike Speed initiative was a global concept that has been executed in every market in which we do business. Brand efforts like this are major investments in the long-term health of the Nike Brand and are a great example of brand building. Mark filled you in on the details of its success as a campaign, and we talked to you about it throughout fiscal 2004.

We are also improving our ability to manage the brand and its profitability. As most of you are aware, there is no quicker way to damage or weaken a brand then to over-inventory a marketplace, compromising value and eroding consumer confidence. Our inventories continued to operate at healthy levels as we do a good job managing most of the marketplaces round world. We're seeing the same for most retailers as well. Profitability is back in vogue in the athletic footwear and apparel industry.

Our ability to execute global concept like Speed are indicative of what we must continue to do to increase our market share in the more developed markets and create market expansion in the emerging economies. What separates us from our competition is our ability to execute a global initiative as well as a locally relevant one, like Euro Champs, the Tour de France, Copa America, as well as a global event like the Olympics. All of these adding to the consumer relationships that we continue to build worldwide.

Most of the time when we talk about investments, we usually end up reciting our demand creation spending or our supply chain spending, and justifiably so as they are substantial. But we're investing in more than just the high-profile examples you're used to seeing from us. I would like to touch on a few other areas of investments that are helping us generate the sustainable performance that we have been delivering.

One aspect of our investment strategy deals with the ever-changing retail environment and our brand presence within it. Over the pass several years we have invested heavily to improve our location and presentation at retail. Since 2001, we have installed hundreds of in-line Nike presentations all over the world. Some are corporate owned, some are franchised, but most are in partnerships with local retailers. These investments have a significant impact on our concept communication, our brand and product messaging, the consumer experience, and ultimately our overall profitability. We have also strengthened our relationship with retail partners whose own business performance has benefited from these investments.

As all of you know, we have invested heavily in infrastructure, our supply chain facilities and distribution. All of these areas have been integral in supporting our business model around the world. Things like the expansion of our European distribution center, warehouse and distribution facilities in Korea and Japan, and of course our IP infrastructure that has taken a large piece of the risk out of designing, developing and building a product line that is recreated every 90 days with over 10,000 new products.

The investments that were made in the last several years and now serving us well. We will continue to invest in this infrastructure to increase productivity capabilities in our existing markets, as well as maintain our leadership position in new and emerging markets, places like China, Russia, Brazil and India. These markets represent some of our growth engines in the future years.

Finally, I would like to wrap up with a discussion of our growing portfolio of businesses and brand. As you are all aware in August we completed the acquisition of Starter Brand and informed a new subsidiary, the Exeter Brands Group. The purpose of this acquisition, in addition to the incremental revenue and profit, will allow us to expand our distribution into the value channel, a large and growing market and one in which we have not participated.

This addition to our portfolio enables us to gain experience in the value segment with an established and reputable brand name, and serves as a platform for further development of this space. Starter is a perfect example of our commitment to build and diversify our portfolio by adding established, leading brands in strategic market segments while preserving the integrity of Nike as a premium brand.

In fiscal year 2004, Converse, which we acquired just over a year ago, Cole Haan, Hurley and Bauer, along with NIKE Golf, contributed $1.4 billion to our total Nike, Inc. revenues and $75 million to our pretax income. For the first quarter of '05 these businesses contributed for 435 million in revenue, a 64 percent increase from the first quarter of '04, and $40 million in pretax income. The point is, this group of brands is collectively accounting for a meaningful portion of our overall results, and is showing the potential to contribute significantly to our performance in the coming years.

We were recently touted in a major U.S. business publication as the new Nike, with a higher level of discipline. It was a very positive article acknowledging some of our current successes, but I have to say, I don't like the word discipline. It sounds like punishment. And maybe retrospectively we deserve to be categorized that way. But I think it is more than that. It is a commitment to being a better company, a company whose goal is to be considered one of the best managed companies in the world. A company that is committed to its shareholders, its employees and the communities we all live in. A company that realizes it's only judge is the consumers who purchase our products. And finally a company that feels it can get better at all of the above. If that is what you define as discipline, so be it. We like to think of it as the way we approach the business.

So I conclude, I would just like to reiterate how excited we are about our continued momentum early on in fiscal 2005. Over the remainder of the year rest assured we will continue to reach consumers with exciting, innovative products and we will be part of many of the amazing athlete performances that are sure to come. But most importantly, we will continue to execute our strategies, invest with an eye on the future, and our profitable growth. Thanks again for participating today. Now we will open it up for questions.

(OPERATOR INSTRUCTIONS). Virginia Genereux with Merrill Lynch.

Pam, is it 1 or 2?

How about 2 today?

All right. Good. First if I may, Converse has obviously been just a great business for you guys, a stronger grower and very accretive this quarter. Can you talk, Don, maybe how much bigger do you guys think that business can get? Is international driving a lot of that as we look out a little bit here?

Virginia, you know that we don't give predictions on that sort of thing, but your opening comment is absolutely on the money. We're delighted with the performance we've seen out of Converse so far. A lot of the growth is coming from international, but also a lot domestically. As you probably know, most of the business outside the U.S. is actually a licensed business, so we don't see a lot of the revenues and flow-through on that. We definitely see a bottom-line flow-through on it. So we are growing both in the U.S. and internationally. We are extremely excited about the prospects for Converse, but I would not want to put a figure on that at this point.

Thanks. And then secondly, if I may, you guys have done a great job always with this, but the U.S. business is going so well, Charlie, you talked a little bit, if maybe you can elaborate on how do you sort of continue to control the distribution and the differentiation by retailer to make sure that -- I don't know -- that their Shox doesn't get too hot out there? How you guys do that nowadays and how are the systems helping you?

A couple of things. I think one of the things that we've been through over the last couple of years, and we've talked about it extensively, is just our overall distribution strategy in the U.S. And I would say today that we are probably as well-balanced across the U.S. in the different channels that we participate in as we have been in quite some time.

The other thing is our inventory management. As Don alluded to earlier, the U.S. inventories are down year-on-year, even against a pretty impressive quarterly performance on the revenue line. So we're just getting better and more disciplined at managing the marketplace and doing a better job. I think the idea is not to totally differentiate all the retailers. I think what we're trying to do is strive for the best retail experience for consumers across the channel landscape and continue to support the people that are investing in those things.

Thanks and great job.

Bob Drbul with Lehman Brothers.

Two questions. The first one, within the U.S. number can you give us an idea how Foot Action played a role within that number and sort of where your business is with Foot Action at this point in time?

Between -- sorry, I am on the last question here. Between Footlocker and Foot Action, if you look at a year-over-year comparison of the two accounts together, there's a couple of points out of that 12. One of the things I think was very encouraging for us is just how broad-based the support was in the U.S. from a whole variety of accounts. So this was not just a Footlocker, Foot Action story.

Okay. And then within the European comments that you made, I think you mentioned that the UK was a better market for you. It is fair to say that that market has turned and there are some improvements around the market there, or can you maybe elaborate a little bit more on some of the trends there?

The UK had a fantastic first quarter. We're not extrapolating that over the balance of the year. I'm reluctant to sit here and say that the UK market has completely turned and headed back in a positive direction. However, I do believe that it is -- has certainly stabilized.

We are continuing to see some shakeout in consolidation in the marketplace. And we think that through using some of the same strategies that we have implemented in places like the U.S. that that market will continue to grow and expand on a long-term basis. And we feel pretty confident that over the next couple of quarters we will start to see some indicators that point towards that. But we're not by any means in a position where we feel like things have turned around and are back on track.

Thank you.

Margaret Mager with Goldman Sachs.

Let's see, a couple of questions here. First of all with regard to the gross margin, it has been coming in way ahead of our expectations for quite some time now. When you look out over the balance of this year and beyond, could you talk about what do you see as the biggest pieces that can continue to move the gross margins upward?

And then I would also like to hear about your forecasting and how you have improved that so that you have better control over your business? So if you could talk about any sort of insight on your forecasting methodology and how it relates to your futures orders? Thanks.

To address the question on gross margin first, as you know, over the last several years we have talked about a lot of things that have driven the gross margin performance. One of the factors certainly has been the improvements we have made in our supply chain, which has resulted in lower supply chain costs as well as an improved position on closeouts, which definitely has a positive benefit on gross margin.

And I think in that space we certainly believe that we can make continuous improvement in supply chain costs. And we still have some room to continue to get better at that, although we've made a lot of progress. And as far as the closeout position is concerned, as Charlie indicated, our inventories in the U.S. are extremely clean. We think there is still probably some opportunity to get to those levels outside the U.S., so we think there's improvement possibilities there.

A second area we have seen a lot of improvement in over the last few years has been in the product cost area. There has been a lot of initiatives, both in the footwear, apparel and equipment space to improve product cost, and those efforts are ongoing. And we think there's going to the continuation of benefit there. A third area that we've talked about is gross to net management, which is making sure that the leakages in the supply chain with respect to the customers, things like charges and claims that we continue to work that beat, and we've had a lot of success there. And again we feel that there's some more to go.

The last area I would talk about is foreign exchange. And there are definitely some benefits we've seen over the last couple of years as the euro has strengthened. With respect to this year, as we have said earlier, we think the second and third quarters we're going to continue to get a little bit more benefit out of that. But over the course of the year that benefit is going to start to narrow as the overlap versus last year's exchange rate starts to get closer. Those are really the major items. And I would say on operating side we're continuing to work all of those areas, and we think that there's more things to be delivered.

Mark, I will add one comment to that which, as you can tell, I think we're fine-tuning and we getting much better at fine-tuning our ability to drive margin performance. But probably the biggest single factor that is probably more of an intangible is just where the brand is and the demand that we create. And that's certainly drives gross margin expansion as well as all the other fine-tuning efforts that we're continuing to get better at. So if you continue to measure the brand strength, you can pretty much track gross margin performance against brand strength as well.

Okay. And then I was asking about forecasting and if there's any insight you can give to us in terms of how you plan the business going forward so that you maintain good control over your results, your inventory, etc.?

Part of the benefit on forecasting is that as the supply chain gets tighter, you don't have to make as many guesses. And one of the things that we have talked about with respect to footwear particularly is that we used to do a lot more blind buying where we had to actually start production prior to having our futures orders in hand. And one of the benefits of our new supply chain system is that it has really cut down significantly on the amount of purchasing we have to do outside the futures window.

Having said that, working with our customers and making sure that we have good estimates for each season and making sure that we merchandise appropriately, and buy with discipline, as Charlie said -- I know he doesn't like the word -- but making sure that we are maintaining a pull model in the marketplace. And not trying to push product in when the demand is not there, that is really one of the things that helps keep your inventories clean, keeps the margins up and lets you forecast more consistently.

Okay. That's all very helpful. Thanks. And another great quarter. And we're looking forward to Asia. So thanks to Pam for planning that trip. And last comment, I love these earnings reports in the morning.

Yes, yes, yes.

Do that again. That would be great. Thanks.

Don't we sound a little sleepy?

No, you sound wonderful. I'm sure you have been out for a five-mile run already.

That's true. Thanks, Margaret.

Dennis Rosenberg with Credit Suisse First Boston.

On the timing issues in Europe, last year's first quarter had a real big benefit from a shift out of the second quarter, and you said you had some benefit this year from a shift from September into August. Can you give us an idea as to the order of magnitude of the benefit this year versus last year and how we should look at the second quarter because of that shift?

We have had a couple of points of growth.

Okay. And last year was a lot bigger than that, right?

Yes, that's a year-over-year difference. (indiscernible) it is a year-over-year benefit to this year is a couple of points.

Was last year's shift a permanent shift?

No, I think what you may be thinking about is you may be thinking about the year went live with the supply chain which was two years ago.

Okay. And the comments on the gross margin in the second and third quarter you said they would be slightly -- it would be a slightly bigger increase in the gross margin. Is that relative to the full year or relative to what you did in the first quarter?

The year-over-year improvement in the second and third should be larger than what we saw in the first quarter.

Great. And I want to second Margaret's comments about these mornings.

All right. Let's pace ourselves here.

John Shanley with Susquehanna Financial Group.

Charlie, you seemed very bullish, and probably rightly so, on the acquisition of the Starter business. Can you give us an indication of longer-term how big this particular operation may be. And are there implications for the Starter-type merchandise going into markets other than the United States?

Yes, John, it is too early in the game to make any even remote projections on what the opportunities are long-term as far as size. I'm not sure we do that even if we did have a firm grasp of it. But we're very excited about this because it gives us an opportunity to, as I said in the prepared comments, continue to expand our reach from a distribution standpoint has one benefit. But certainly the other benefit is that it takes some of the pressure off of Nike and even Converse to some degree in participation in some of the different opportunities that we have at retail. So that is very exciting for us. And again, it continues to build the overall portfolio against the opportunities in the marketplace.

And is there an opportunity outside the U.S. for that type or product?

We are still too early in the process to say. But we would certainly -- we're entertaining that as a possibility. I wouldn't be in a position today to tell you that there are those types of opportunities, but we're going to look at that as a global brand opportunity.

Okay. Fair enough. And the other question I had was on -- the European sales was very helpful to get the comments on the individual countries. Charlie, can you give us an an indication if we looked at it in a bigger geographic area, is the business growing more rapidly in Eastern Europe and the Middle East than it may be in Western Europe? I mean, is it becoming a much more important component of the European sales overall?

Yes, no question, and which has been pretty consistent with our releases over the last several quarters. Central Europe continues to be a great marketplace for us as we expand both distribution and market penetration in the central, and now including Russia. So this is the first quarter that we've actually reported direct Russian results. It is another market that we're new in from an owned and operated standpoint. And we're excited about the future from central and Eastern Europe.

How about the Middle East?

The Middle East is still hit and miss. We've got a couple of countries that are doing well but it is still not a significant portion even of the European business.

Noelle Grainger with J.P. Morgan.

Two questions. The first is your comparisons get a lot tougher. Can you talk about the trend over the futures period, given the really strong number you reported?

And then the second question would be back to Europe. You made a comment I think last quarter about looking to diversify away from football and drive the business more broadly. And I was hoping that maybe Mark or Charlie could elaborate a little bit on the initiatives around that and kind of where you stand?

With respect to the trending, there are a little bit stronger futures in the first half of that window, so that would be in our second quarter. But that doesn't necessarily translate exactly into revenue. As we talked about on every call, you can't necessarily match the two up. But just to lay out a couple of issues here, certainly the U.S. region was posting stronger numbers in the second half last year, so we going to overlap against that. Foreign exchange comparisons get a little bit tougher as well as we go into the second half of the year. And so those are going to be key elements. And then we also just talked about Europe where we had a little bit of the second quarter moving into the first. So you need to take those items into account as well.

This is Mark. I will comment on the diversification in Europe beyond football. Obviously we have focused on football and have seen some tremendous success in our position in Europe, and that focus will continue to be there. Obviously, we have major sites set on Berlin in '06, and we going to continue our momentum in the football area.

That being said, we also realize I think for the strength of our European business overall, we really need to make sure that we can focus on some of the other key categories such as running, women's -- just overall in and women's, particularly in the fitness and training area. The active business, making sure that between sport and active that we've got a good balance there. We feel really good about our position, at least we're trying to develop right now. And then even sports like basketball, which are seen as being U.S. centric. But really basketball is becoming much more of an international sport and some of the European players coming into the U.S. It is really starting to get much more attention over there. So we really fully intend to take advantage of that opportunity as well. We really feel like our long-term success in Europe and continued growth is going to be based on diversifying beyond our more singular focus on football.

Jeffrey Edelman with UBS.

My first question relates to your retail business. Could you give us a sense today how much that represents of your total sales at this point? And what were the overall comps for the group?

The worldwide our retail sales are a little over 10 percent of our total revenue. And the group is obviously very complex. I mentioned earlier on my prepared remarks that the Nike Towns in the U.S. were up 10 percent comp store numbers in the first quarter. In the U.S., our factory store results have been somewhat less robust. And frankly the major issue is lack of inventory. Our inventory in the U.S. is so tight that even our factory outlet stores don't have quite as much product as they've had in previous years. So that is a little bit of a good news circumstance for the overall business, but a little tough on the factory stores.

With respect to the other regions, generally retail has been performing pretty well, but it is also relative to the markets that we're in. So Charlie talked about some of the challenges in the UK and some of the competition on the high streets in Western Europe. We've definitely seen that in Nike retail as well. Strength we've seen in Asia has been reflected in Nike retail. So it is really market specific.

Okay. Good. And secondly, my question has to do with the comments you made about investing in the product value relationship in Europe. It appears as if all the athletic footwear companies selling into Europe have had this big benefit from buying in China. Could this be the beginning of some of the passing off ultimately of some of those savings that you have been able to realize, because it appears to have taken place in a lot of apparel categories throughout Europe?

Well first of all, it is not necessarily all about sourcing in the sense that we have sourced from Asia for quite a long time. And we source apparel from all over the world, including some of the places in Europe and Asia. I think the foreign exchange situation has definitely affected the economics in Europe. And with the strengthening of the euro that has meant that people's margins in Europe have differently expanded.

Our belief as we have said many times is that the value equation is not just a function of price, it is also function of the value of the product, of the futures in the product that the consumer gets. And so our approach to investing in the value equation is not about rolling back prices across the board. What it really is about is making sure that there is perceived consumer value at every price point and with every product category. And that is making sure that you have the right product with the right features at the right price point.

And we have made a definite decision in fiscal '05 to make sure that we're doing that aggressively to continue to grow the European market, because we think there's still a lot of growth potential left there. And so we're pulling all those levers. And the good news is we're continuing to grow our margins even with that investment.

Jim Duffy with Thomas Weisel Partners.

You now have product in all channels from discount right through the boutiques. Can you provide some commentary on what you're seeing in each of those channels, and any kind of trends that you think may be sustainable or changes you're seeing there?

This is Mark. I will start that. The back to school season here we have seen probably the most balanced success we've had across distributions or channels of distribution in a long time. I think it is not that we don't have some challenges in there. I think on the apparel side in the active area we're still seeing some challenges in the bigger department store business.

Overall though I think we really focused on our categories in both sport on the active side of our business and managing distribution better. So as Charlie said upfront, we're starting to see the success in terms of channel by channel business for back to school. So that is -- as far as major trends go, I think what we're going to continue to really focus on our business by channel in starting to design I think product more effectively upfront to make sure that we're satisfying the consumer that shop in those channels. But overall I think I would just say that the balance we have had for back to school has been the best that we've had in a long time.

Good. In the prepared remarks, I couldn't help but notice that a lot of your commentary on sporting events and things that had driven excitement for the brand were kind of retrospective. How long do you think this equity that you have built with that is sustainable? And what are some things you see coming down the pipeline that can continue to fuel that?

As I said, we have seen great momentum coming off our Olympic efforts in years past. This year I think it was our best effort overall from both a business, commercial standpoint and a brand standpoint. We feel like it is given us great momentum moving into fiscal year '05. The buzz off the Olympics I think will continue. The attention around sports will continue, not just with the Olympics, but the whole as we said summer of sport. So we have lots of opportunities on the product front to take advantage of that buzz. In footwear we have Shox. We're in the middle of -- which we continue to develop some franchise product in that area across categories. We're in the midst of revamping, reenergizing our whole Air efforts, so you will see some pretty exciting product coming in this next year along that line.

Our Signature product with Michael Vick, LeBron James, Serena Williams and others will continue to reenergize those categories. On the apparel site, both on the active business, our women's trainings and fitness product, man's performance team sports, we have worked -- we're working on a number of technologies that are more accessibly priced to make sure that our mix and product is well balanced.

Soccer, we will continue to energize that category. We have a whole new collection of product coming out called Piampo (ph), which is on the heels of Total 90, so we will continue to see that category -- see some great product innovation. So I think overall in my time at Nike I've never seen so much great product coming down the pipeline as I do now moving into fiscal year '05 and even into fiscal year '06. So I am quite bullish on that front.

This is Charlie. I will just add one other common to that too. I think we do talk about events a lot, and it does drive a lot of I think curiosity and viewership from a consumer standpoint. But again we kind of get out of that mode now and go back into that mundane athletic approach to the leagues and the contests that go on on an annual basis. And what that does, and Mark mentioned it too, is the idea that it gives us a chance now to focus on the athlete again and start to draw on those athlete personalities. And those are some of the things that really give additional dimensions and some accessibility to the brand around the world.

Did the events drive a fashion cycle? Historically have you seen that?

Yes, I think so. I think the Olympics effort we had, you know it is a little early to tell what kind of fashion trend might be coming off the Olympics, for example. But I think you'll see closer fitting product. You've that seen in the fashion world, but it is definitely in the sport world with some of our Pro Compression for example, a little more body fitting products. You'll see that trend I think continue through this next year.

And some of that -- I'm not sure if Serena Williams' outfit will translate into broad commercial sales as an outfit, the one you saw at the U.S. Open. But we have some great product coming for the Australian Open with Maria Sharapova, Serena as well. We have every intent to make sure that what we do on the court, on the field, really translates into commercial success both in performance and then through the active business as well.

I do want to just point out that Charlie was being tongue in cheek with his comment about mundane athletes' performances.

Right, right.

Just for the record.

I understand.

We will take one more question.

Our last question comes from Robert Toomey with RBC Dain Rauscher.

I just want to get a better understanding, if you could spend a minute or two on talking about your longer-term strategies for both Converse and Starter. I know you answered a question earlier about Starter, but I'm not totally clear how you're going to leverage that business, and I wondered if you could just expand a little bit on your strategies for both of those, and where you expect the growth to come from? Thank you.

This is Charlie. I think also with Converse -- right now Converse is having a great performance around the world. Don mentioned a little bit about the fact that most of the international business is a licensed business. And we do not own the Converse business in Japan. So there is still a lot of upside there. It is primarily our footwear business, and I think there are some opportunities to expand the product range under that brand name and certainly the distribution around the world. So that is something that we think and talk a lot about there.

I think from a Starter standpoint, as I said, we are very early in the process as we evaluate our opportunities and what our priorities are in developing there. It is primarily an apparel brand, and so there would be some obvious opportunities that we can pursue in footwear that we're looking at as well. And so and I don't want to venture out into an international proposition around that right now. It is very early in the stage of development of the business, and we will keep you guys abreast of the decisions that we make as we go forward.

This is Mark. I will just add that the fact is, as Charlie mentioned in his prepared remarks, we have a pretty robust portfolio of Nike Inc. brands, both footwear and apparel. So we are in a great position to really take advantage of the opportunities those brands represent. There is a lot of design and technology that has developed within Nike. And we really feel like we're in a position to the feed that design and technology to different brands, being respectful that each of these brands is different, has a different position, a different distribution.

But the fact is that the Nike product machine design, design, development machine can really I think exploit opportunity more effectively across such a great portfolio of brands. So we are quite bullish frankly. And on the international front, I wouldn't, as Charlie said, make any predictions in the short-term, but certainly in the long-term that is going to be more a part of the future of our other non-Nike brands.

And just to clarify too, from a financial standpoint, Starter operates largely on a licensed model as well. So it is a model that will not necessarily generate large amounts of revenue, but obviously has a very high flow-through of the profitability. So just in terms of managing your expectation in terms of how that business will develop in our financial results, you won't necessarily see it as much in the top line as you will on the bottom line.

Okay. So would the Nike brand be marketed through Starter, or would you overlap the brands? I'm not clear on that.

No, Nike brand and Starter are completely separate brands and will not overlap.

All right, thanks everybody for joining us today. I wanted to just remind you that we're heading to our annual meeting of shareholders here this morning. So any follow-up questions, we will do our best to get back to you, but it will probably be later this afternoon. Okay. Thanks so much. Have a great day.

This does conclude today's teleconference. Thank you for your participation. You may now disconnect.