Nike Inc (NKE) 2005 Q2 法說會逐字稿

Please stand by, we're about to begin.

Good day and welcome to the Nike second quarter 2005 earnings conference call.

Today's call is being recorded.

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

Please go ahead Ma'am.

Thank you.

Good afternoon and happy holidays everyone.

We're pleased you're joining us today to discuss Nike's fiscal 2005 second quarter results.

For those of you who need to reference our release you'll find it on our Web site, www.Nikebiz.com.

You'll also find expanded information on the Web site about some of the highlights we'll be discussing today.

Participants in today's call are Phil Knight, Chairman and Chief Executive Officer, Charlie Denson and Mark Parker, President of the Nike Brands, and Don Blair, Nike's Chief Financial Officer.

Each of today's participants will provide brief prepared remarks which will also be available on the Web site 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 filed 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 on the mix of futures and at once orders which may vary significantly from quarter to quarter.

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

Finally during this conference call we may discuss non-GAAP financial measures.

A presentation of comparable GAAP measures and quantitative reconciliations can also be found at Nike's Web site.

In this call we may also discuss nonpublic financial and statistical information which is also publicly available on that site.

Now here's Don Blair.

Thanks, Pam.

Well as you now know our business momentum continued in the second quarter as our global portfolio continued to deliver outstanding growth.

For the quarter our revenues grew 11% to 3.1 billion.

Changes in currency exchange rates accounted for about 3 points of growth.

Acquisitions had a negligible impact on our second quarter revenue growth since we've now passed the anniversary of the acquisition of Converse and the impact of the Starter acquisition was not material this quarter.

Diluted earnings per share for the quarter were 97 cents up 47% versus fiscal 2004.

For the quarter our consolidated gross margin was 44.1% up 180 basis points versus last year's second quarter.

Gross margins improved in each of our regions and for our other businesses as a whole.

Our international regions accounted for about half of the consolidated gross margin improvement as positive currency changes were partially offset by the impact of higher inventories and additional discounts in Europe and Asia.

Overall the gross impact of currency movements was 1.6 points on consolidated gross margin.

As expected the growth in SG&A spending moderated in the quarter largely as a result of demand creation investments made during the first quarter around the summer's global sporting events.

Futures orders for the next 5 months grew 9.1% in both real and constant dollars.

Our trailing 12-month return on invested capital was 22.9% and over the first 6 months of fiscal 2005 we've generated $622 million of free cash flow from operations.

I should note that since return on invested capital and free cash flow from operations are non-GAAP terms we've posted the definitions and calculations on our Web site.

We also continue to deliver significant amounts of cash to shareholders.

Over the first 6 months of the year we've paid out $105 million in dividends, and last month we raised our dividend 25% to an annual rate of $1 a share.

Over the same 6-month period we've also repurchased $204 million of our own stock.

In our European region which includes the Middle East and Africa revenues grew 13% in Q2 with about 8 points of the growth coming from more favorable exchange rates.

Footwear revenues grew 13%, apparel revenues advanced 14%, and equipment revenues were up 18%.

Revenue growth for the quarter was driven by strong sales in Italy and the emerging markets in central Europe, Turkey, and Russia partially offset by lower revenues in France.

Sales through Nike-owned retail stores also grew strongly reflecting the addition of new factory outlet stores in the region.

Gross margins in Europe expanded 2.6 points for the quarter accounting for 80 basis points of our consolidated margin improvement.

Improved foreign exchange rates were the main driver of gross margin improvement in Europe partially offset by higher close-outs across all product divisions.

Reported second quarter pretax income for the European region increased 43% to $198 million reflecting growth in revenues and gross margins, SG&A leverage and the positive impact of the stronger euro.

In the Asia Pacific region, revenues increased 17% in the second quarter.

About 3 points of the increase came from stronger currencies.

Footwear reported 15% growth while apparel grew 19% and equipment advanced 23%.

Revenues in China doubled in Q2 while Japanese revenues again grew double digits.

For the quarter, Asia Pacific gross margin advanced 40 basis points, accounting for a tenth of a point of the consolidated gross margin improvement.

Reported pretax income for the quarter grew 14% to $112 million.

The Americas region delivered a stellar second quarter as revenues grew 23% and reported pretax income grew 43%.

Stronger currencies accounted for about a point of revenue growth.

Gross margin improved 1.5 points in the quarter accounting for about a tenth of a point of the consolidated gross margin improvement for Nike, Inc., while SG&A growth slowed following the heavy demand creation investments in the first quarter.

Every country in the region posted higher sales for the quarter with the strongest results in South America.

Our U.S. region delivered another outstanding quarter as revenues advanced 5% and reported pretax income grew 21%.

Strong growth from athletic specialty accounts, particularly Footlocker and Finish Line, drove much of the top-line growth although our business also advanced strongly with key accounts in other channels.

Comparable store sales for Nike Town stores grew 7% in the second quarter reflecting the continuing strength of the brand and improved store operations.

Footwear revenue for the U.S. region grew 9% in the second quarter driven by a modest increase in unit sales and a significantly higher average price per pair, reflecting strength in higher-priced sport performance models.

Apparel sales in the U.S. fell 3% as double-digit growth in branded apparel was more than offset by a steep decline in licensed apparel.

The increase in branded apparel was driven by strength in sport performance and women's products across a variety of accounts.

Sales of licensed apparel fell more rapidly than expected due to expiration of our licensing agreement with the NBA and a shift in consumer preference toward branded apparel.

U.S. futures orders scheduled for delivery from December through April of next year rose about 10% versus the year-ago period.

As we've discussed on many occasions these reported futures do not cover some components of our overall revenues such as licensed apparel, close-outs, at-once orders, and retail sales.

As a result, revenue growth for a given period may not track precisely in line with futures growth.

Over the balance of the year we expect U.S. revenue growth in the low to mid single digits below our futures growth primarily due to lower revenues from these non-futures sources.

Gross margins in the U.S. advanced 1.1 points for the quarter driving 40 basis points of our consolidated gross margin improvement.

Gross margins improved across all 3 of our product businesses although footwear continued to drive the growth through a combination of higher in line margins and fewer close-outs.

Lower SG&A spending combined with higher revenues and gross margins drove management pretax income to $233 million, up 21% versus last year's second quarter.

In the U.S. region demand creation spending declined versus the prior year quarter and operating overhead grew less than 1%.

For the quarter revenues from our other businesses grew 12% to $382 million.

Cole Haan delivered the largest share of the revenue growth posting an 18% increase for the second quarter.

Our other businesses earned $21 million of pretax profit driven primarily by higher profits at Cole Haan and Converse and the addition of Exeter.

Consolidated SG&A spending for Nike, Inc., grew 8% in the quarter driven by a 3% increase in demand creation and an 11% increase in operating overhead.

Changes in exchange rates accounted for about 3 points of the increase for both demand creation and operating overhead.

As expected demand creation spending eased in the second quarter following our first quarter investments in advertising behind the summer's global sporting events.

In addition to the impact of currency the increase in operating overhead reflected higher personnel costs due to increased headcount, higher wages and benefits, and incentive-based compensation reflecting the Company's strong sales and profit growth.

We continue to invest in Nike-owned retail stores, implementation of new systems, and infrastructure to support the growth of emerging markets in Asia and Central Europe.

Other expense in the second quarter includes foreign currency losses primarily from hedging.

These losses were slightly higher than for the second quarter last year.

The net effect of these foreign currency losses and the favorable translation of foreign currency-denominated profits was $17 million of additional pretax income for the quarter.

Our effective tax rate for the quarter was 35% bringing our year to date rate to 35.2%, our current estimate for the full year.

The strength of our balance sheet also continues to be a highlight of our financial performance.

Our balance of cash and short term investments was 1.7 billion as of the end of the quarter.

Our interest bearing debt was $850 million as of the same date.

Worldwide inventory, one of our most important operational metrics, is also in excellent shape.

As for November -- as of November 30, worldwide inventories were 6% higher than a year ago with currency changes accounting for about 5 points of growth.

Inventory in the U.S. fell 7%.

At the end of the quarter accounts receivable were 8% higher than the prior year.

Stronger foreign currencies accounted for about 6 points of the growth.

As you'd expect we're very encouraged by the performance of our portfolio businesses so far this year.

Over the balance of the year we expect mid single-digit revenue growth bringing our full year into the high single-digit or low double-digit range.

We expect low double-digit revenue growth in the third quarter reflecting the strength of Q3 futures.

For the fourth quarter we expect low to mid single-digit growth driven largely by lower growth in the U.S. as discussed earlier.

For the year we still anticipate that better foreign exchange hedge rates will enable us to be more competitive in Europe and Asia and grow our overall gross margin percentage.

We expect balance of year gross margin will be broadly consistent with the first half.

The increase in gross margin should be greater in the third quarter than the fourth since the year-over-year improvement in hedge rates will be more significant.

For the balance of 2005, we're now planning SG&A spending relative to revenue at about the same level as the first half of the year.

As a result of our strong results thus far this year, we'll be taking the opportunity to accelerate development of our business in several emerging markets and product categories.

As indicated earlier we do expect the timing of demand creation spending to result in a relatively lower level of SG&A spending in the fourth quarter.

So in summary we're very pleased with the year so far and feel confident that we're in a position to deliver another great year for our shareholders.

With that I'll turn the floor over to one of those shareholders, the Chairman and CEO of Nike, Mr. Phillip H. Knight.

Thank you, Donald.

It was in June 2002 on this conference call when I announced that this would be my last conference call, and -- but the results for this quarter were so good, that I had to come back and take credit for them.

The actual truth is reversed.

I would first of all like to recognize Mark and Charlie who have been the heroes over this last two-and-a-half years and beyond, they were fairly new in their tenure as Presidents of Nike brand in June 2002.

Stock price was $41 a share then, and basically I think the results speak for themselves.

Our tribute to the 2 of them and to the rest of the management team including but not limited to Don Blair, Mindy Grossman, Gary Stefano, Roland Wolfram, Mary K. Buckley, Eric Sprunk and many, many others.

We're really pleased with the management team we have in place now and I think again that the results really speak for themselves.

The biggest single reason I think that Pam ordered me to show up today is -- is because that we announced that there will be a new CEO effective December 28, and that's Bill Perez who is coming to us from S.C. Johnson.

And I think, I guess -- the first question is, is why now, and as I said to our people, I think that what I didn't want to happen is to have a situation when earnings were going down and that I was sick and I passed my last physical and earnings are going up, and man is mortal, so it is a good time as far as bringing in a CEO.

The other question, of course, obviously is inside versus outside, and while this may have appeared to be a sudden decision to the outside world and maybe even to a few people at Nike it was something that was thought about and agonized over for more than 2 years and it went back and forth between inside versus outside, and I think that what I've said is if this were just a Nike brand situation we would not have gone outside, but in looking forward you say that in the next five years the brands other than Nike this is not a forecast or prediction, but a brand other than Nike could be as much as 25% of our total volume which makes a much more complex picture than what we have today and one that I think is healthier but, again, more complex.

So if there was somebody from the outside who I thought had the skill set and would fit in culturally I thought that was what I would do, and that's what I did do.

I think that S.C.

Johnson, where Bill Perez comes from, is not a publicly traded company, it doesn't have a high profile outside its Wisconsin base, but it is a company that's well run, he's been CEO there for the last 8 years, he's had great results, he's got multiple brands selling in 110 different countries, a smaller company but a more complex portfolio than we have here and I think that he brings skills that will be helpful.

I think that beyond that one of the things that's allowed us to be successful over this last few years has been the great personal characteristics of both Mark and Charlie, that they've been team players that have subverted their own egos for the good of the team and I think Bill Perez fits in that equation pretty well and you'll get a situation where the triumvirate of Bill and Mark and Charlie is something that I think is, once they get through the initial period of feeling each other out, I think it will be a very healthy team and at the end of the day it's a challenge, and again this is not a prediction or a forecast, but the challenge is not to get Nike Incorporated stock to $100 a share, the challenge is to get to the $200 a share, and that was a big part of my mind-set, and I hope that gives a little bit of explanation on why we've done what we -- what I did.

But don't just take my word for it.

Obviously, I want to check his references and a lot of our big shareholders have done that and have been impressed by what they found, and I think he expects to be in New York in March to meet with the New York area shareholders and financial people but over and above and beyond everything is our results.

Watch how we do.

And I think we've got a great future.

And with that I will turn it over to one of the real heroes over the last three-and-a-half years, over the last 25 years, over the last quarter, Mr. Mark Parker.

Thanks very much Phil, and good afternoon everyone.

Each quarter I try to give you our perspective on the strength of the Nike brand in the marketplace.

Last quarter on this call we talked about the great position we believe we're in and how our brand strength and business growth would build on the summer of sport.

Supported globally by the Nike Speed initiative.

Based on the results that Don presented to you earlier I think you'll agree that our confidence was warranted.

We're certainly seeing signs of continued brand strength across the sport and active lifestyle spectrum of our business but I want to focus my comments in the brief time I have with you this afternoon on the core performance sports for Nike, particularly running, basketball, and American football.

Starting with running, our largest category.

We're seeing a resurgence in running that is very exciting and we're supporting the growth of running in many different ways.

For example, more than 9,000 women ran in the inaugural Nikewomen's marathon in San Francisco on October 24.

Over 50,000 runners participated in the popular run hit wonder race tour in L.A., Chicago, Portland, and New York.

And just 2 weeks ago the fourth annual Nike run London 10-K had 30,000 runners all wearing Nike dry fit product, we're seeing a great trend of more and more younger runners showing up for these events.

In fact, cross-country is one of the fastest growing high school sports in the U.S.

Two weeks ago we hosted the Nike team nationals here in Portland featuring 40 of the top high school-aged cross-country clubs in the nation, male and female, and we drew over 4,000 spectators.

It's just another example of the many grass roots efforts our running team supports in the U.S. and overseas.

For a Company that was founded by runners for runners this running renaissance, especially by teenage athletes, is a great sign of potential growth opportunity in this category for Nike.

This quarter our global running footwear revenues were up 10% and increased 13% in the U.S.

Our futures orders for running indicate sustained growth in this category.

Another area of continued strength for Nike is in basketball.

On the court both Lebron James and Carmelo Anthony have already passed 2,000 career points and they did it while playing in fewer than 100 career games.

Even more importantly both the Cleveland Cavaliers and Denver Nuggets are improving, and the Cavs are actually at the top of their conference.

At retail Carmelo's first signature shoe, the Melo 1.5, has generated strong sell through as has Lebron's Air Zoom Generation 2.

And while I'm talking about Air Zoom, I want to acknowledge the tremendous success we've seen with the Air Zoom Vick 2 worn by the incomparably gifted and exciting Michael Vick who has led the Falcons to a postseason berth in the NFL playoffs.

On the college gridiron, 2 Nike team sports partners USC and Oklahoma will face off in the Orange Bowl for the Bowl champion series championship and 7 of the 8 Bowl teams will be wearing Nike footwear..

NCAA basketball is just getting started on its drive toward March Madness.

College licensed apparel now makes up the majority of our licensed apparel business and it's definitely been a bright spot in what has been a tougher team sports market overall.

Across the board we're seeing sustained growth in the core sports helping to drive our performance footwear and apparel business.

We've now recorded 6seasons of positive footwear futures extending now through late spring '05.

What makes me even more excited is the fact that we've been seeing positive sell-throughs throughout our account base.

I believe that these are clear signs that we're managing the marketplace well.

I'm also very pleased that we continue to see the average footwear price moving upward.

Not only does Nike continue to lead as the premium footwear brand in the U.S. marketplace we're also doing so across 2 very distinctive technological platforms, Nike Air and Nike Shox.

In October we launched the Shox 245 our best Shox running shoe to date.

During its first 2 months on the market we've seen solid sell-through of this product.

As for overall Shox business we've seen growth of over 100% for this past calendar year versus the prior year and we continue to be excited and confident about the ongoing growth potential of Nike Shox products.

And in the coming months we'll expand our introduction of the new Nike Free footwear an incredibly strong technological innovation developed in partnership with university research on technical training, and by the way these are great looking shoes.

You'll see a lot more of Nike Free in 2005.

In apparel Nike Sphere and Nike Pro Compression are true product innovation success stories.

Nike sphere represents our relentless focus on innovation in sport with fabrications that literally open and close depending on the temperature and environmental conditions.

Clearly this has broad application across multiple sport categories.

For example, in tennis where next month Serena Williams, Maria Sharipova, Roger Federer, and other Nike tennis athletes will compete at the Australian Open wearing products featuring Nike Sphere cool technology.

Pro Compression is an authentic first layer performance product that is worn by more athletes on the field than any other product, including more than 40 college football teams and most players in Major League Baseball.

Its strong performance message puts us in a powerful position going into the third quarter as we launch a major integrated product story centered in Nike Pro.

We're focused on the high school and collegiate on-field athlete.

Shifting briefly to brand marketing and Nike's unique ability to connect via TV and Internet I'd like to quickly talk about the success of a poignant ad we aired in October called Finally.

Really the title sums it up, after 86 years the passion and loyalty of Red Sox fans were rewarded and we honored that great sports moment with a very simple ad featuring generations of Boston fans rooting their team to a championship that seemed to never come until this October.

The ad generated the highest traffic and downloading of any Nike ad on Nike.com and clearly resonated with Red Sox and baseball fans everywhere.

At the same time that our brand continues to be hot in the core sports arena we're also driving profitability through operational excellence.

As you heard from Don our gross margins are 44.1% in part driven by currency and in part driven by the increasing benefits we're deriving from our global supply chain improvements.

Improvements which include a much clearer view of inventory and shipments from any of our factory partners, putting us in a much better position to meet requirements more effectively and efficiently.

We also have the ability to analyze cost variances at a more detailed level which allows us to better manage our margins.

The total impact of the many capabilities like these is translating into improved profitability and customer satisfaction.

I'm pleased to see Nike sustained growth is coming from not just one category or region but from across multiple sport categories, multiple geographic regions, and multiple brands.

Performance sport and active life, core and nontraditional sports, the Nike brand and the brands in the corporate portfolio, on every front we're seeing growth and growth opportunities.

I think Charlie will agree that in our 25 years in the industry we've never seen a global marketplace where there's so much potential opportunity.

And never have we seen a better -- never have we been in a better position to capitalize on these opportunities and continue to build brand strength which is a good time to take a moment to welcome Bill Perez to Nike.

Clearly Bill brings to Nike a personal passion for sports and perhaps more importantly as Phil said the expertise to manage and grow successfully a multibrand portfolio.

With Bill taking the helm of Nike, Inc., Charlie and I can stay focused on realizing the great opportunities for the Nike brand.

Before I turn things over to Charlie Denson I'd like to wish everyone a very happy holiday and health and prosperity in the new year.

Charlie.

Thanks, Mark.

Hello everyone.

Thanks for joining us today and happy holidays.

As Don had highlighted we put up another record quarter which is making this holiday season that much more enjoyable for everyone here in Beaverton.

What happened in fiscal 2 '05 behind us we're confident that our strategy for generating consistent profitable growth is sound and our management team is executing effectively.

It was almost a year ago today when I said that our industry in the U.S. was in its healthiest state in over 5 years.

Today I'm happy to tell you that the U.S. market remains very strong and that Nike has been a major driver of that sustained strength.

The energy we're creating with our steady stream of innovative performance footwear and apparel, focused brand messaging, and connections with the best athletes and teams in sports is generating a level of excitement in the marketplace we haven't seen in years.

I have to admit over the last couple of years we've spent a good deal of time communicating to this audience about our global portfolio.

The benefits of that diversity and our ability to deliver consistent results.

That said it sure makes things easier when we have our biggest market providing above-average growth.

All of this translates into the kind of results that we're reporting today including the 5-month futures that are up 9.1% globally and 9.6% in the U.S.A..

It's very gratifying to see the strategies we've laid out over the past several years continue to deliver results.

For those of you who know us it won't surprise you to hear how strong we feel both about our current success as well as how bullish we are on the future.

We see lots of opportunities to continue to capitalize on our momentum in the U.S. by focusing on our core areas of basketball, running, and training.

We've been driving growth in those areas simply by delivering excellent product and captivating brand messages like those Mark just highlighted.

We also think an area where we've only scratched the surface is the women's fitness category.

A couple years ago we highlighted this area as a significant growth opportunity and we've been working hard internally for the last 2 years to better align ourselves with this consumer.

Understanding her product needs, her shopping patterns, et cetera.

We have made some dramatic changes in the way we are developing the product and making it available to her.

I think we can now comfortably say that we are ready to attack this opportunity on a global basis.

We have begun sustainable marketing campaigns, tested new product categories, and begun to fine-tune our brand presentation at retail.

We're starting to see some of the results represented in our futures orders, the response we're having to our new direct catalog for women, and the Nike womens retail format in which we've added 3 new locations here in the U.S. in Atlanta, Palo Alto, and San Diego.

You'l be hearing a lot more on this initiative over the next couple of years.

Another great quality about this quarter's results is the overall performance across the entire portfolio with almost every single business unit delivering double-digit growth in our international regions.

We remain very optimistic about our opportunities on a global basis.

In Europe, as you're all aware, it's been tough to get a clear read on trends within the big 5 western European countries.

Softness remains primarily in France, Germany, and the Nordic regions as macroeconomic conditions continue to hinder consumer confidence.

We're seeing a strong rebound coming out of Italy as well as some positive signs coming from the UK.

We're gaining confidence that we are finally starting to see an improving UK marketplace.

I feel confident that we have strategies in place that will continue to drive productive and profitable growth in our western European markets as you can see from our 13% revenue growth for the quarter, 5% on a constant dollar basis.

We continue to see strong growth coming out of central Europe and I'm very encouraged by the early numbers we're seeing from our newest entity, Nike Russia.

We've identified a number of high potential opportunities in the region and feel confident that we'll continue to make progress in Europe going forward.

Moving to Asia Pacific, not surprisingly, China remains our fastest growing country in the region.

Our retail presence in China is expanding rapidly and Nike product can now be found in over 1,500 locations in the country with over 1,000 of these doors operating as Nike-only managed space.

We continue to be encouraged by the level of sports enthusiasm in the country and see the basketball and football or soccer as two of the largest opportunities from a category standpoint.

We're already gearing up for the '08 Beijing Olympics which promises to be one of the most memorable in history.

Nike will play a prominent role as we have signed 21 of China's 28 Olympic teams.

Our Japan business continues to grow but we've seen some softness in the overall footwear market.

We feel confident that we are gaining market share here as we focus on energizing the demanding Japanese consumer.

And Korea continues to be a little slow as we clean up our inventories there.

Finally the Americas which turned in one of the strongest quarters we've seen in some time, as Don alluded to earlier, Canada, Mexico, Brazil and Argentina all had strong financial performances with both Argentina and Brazil hosting major running events during the quarter.

On the operational front we continue to improve our systems and processes around design, development, manufacturing, and delivery of product.

We've made major progress in implementing systems that give us greater visibility as Mark said, into our inventories, tighter communication with our manufacture and retail partners and greater responsiveness on critical delivery decisions.

Mark talked about the inspirational ad we ran following the Red Sox long-awaited World Series victory.

What I also find inspirational was our ability to, while the champagne corks were still popping in Bean town, create and ship more than 40,000 Boston reigns T-shirts to relieve Sox fans around the country.

It's just an example of our improving operational capabilities, but one I thought worth sharing especially for our Boston-based shareholders.

As we told you previously our recent supply chain implementation in Asia puts almost 90% of our revenue base on the new system.

We feel that we are still in the early innings of the game in terms of realizing these benefits but many of the improvements we've shown over the last year in inventories and gross margin improvement can be traced back to some of the new tools we have in our new IT infrastructure.

Finally before I close I'd like to welcome Bill Perez to his new home at Nike.

I'm looking forward to working with Bill, learning about managing in a global economy and finally I'd like to thank Phil for what he has created here at Nike.

As we all know he is the visionary of what is now seen as one of the most recognized and powerful brands in the world but it's been his leadership and his commitment to the people that work here that has always impressed me most.

The next phase of Nike's growth will be every bit as exciting as the last and we're all looking forward to it.

I've heard many times Phil ask the question could he have ever imagined what Nike has become when he and Bill started the Company 32 years ago.

He always answers the same way.

He laughs, he smiles, and jokingly he responds, we're right on plan.

I've never thought for one moment that he's joking.

We'll open it up for questions.

The question-and-answer session will be conducted electronically.

If you would like to ask a question you may do so by pressing the star key followed by the digit 1 on your touch-tone telephone.

If you are using a speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order that you signalled us and we'll take as many questions as time permits.

Once again press star, 1.

We'll have our first question from Bob Drbul, Lehman Brothers.

If Phil is still in the room, I have a question.

Ask the question.

I'll tell you whether I'm here.

Well, first of all I just want to congratulate you on retirement.

It's not retirement.

Well, good luck with everything. [ LAUGHTER ] Whatever it might be.

Thank you.

Next question.

I guess, Phil, when you look at the industry today, and you were to look out 5 years from today what do you think the big opportunities are for both Nike as a Company as well as the industry?

Well, I think, you know, as Charlie says, you know, the United States in many ways has never been healthier, if you look at what kind of the forecast was for the industry 3 years ago in the United States and it said there wasn't any growth left so I think that you know, I'm pretty bullish on the industry both -- not just in this country but internationally, and so I love the business that we're in and I think it's so closely tied to sports which continues to grow that I'm very optimistic.

I'm very optimistic about the industry in the United States but even more so outside the United States.

Okay.

Well, great.

Good luck.

Thank you.

On -- for Charlie --.

Hi, Bob.

How are you guys?

Good.

On the -- just a little bit more color.

On the futures trends, within the U.S. business I guess overall and within the U.S. business can you just talk a little bit on the sequential basis of the, you know, the slowdown or what you see in the back half of the year in terms of how we might expect that -- the significance of the difference in the numbers?

Well, I'm not sure I understand your question, Bob.

With respect to the futures numbers?

Yeah.

I mean, is there -- in terms of the order book from, let's say, the third quarter into the fourth quarter, is there a dramatic difference in the magnitude of the increase from the third quarter to the fourth quarter?

Not a significant difference.

I mean there is a little bit of a spread but there's not a significant difference over the second half.

Bob, just to give you a sense of how that plays out through the revenue numbers as I said earlier we think that there's going to be a lower level of non-futures businesses and one of the things that's included there of course is the licensed business, particularly the NBA, but also close-out sales and at-once business.

One of the things I point out here is lower levels of close-outs and lower levels of at-once business in some ways is indicative of a healthier business mix because we've been establishing a pull model and I think our futures growth is really strong and one of the indications is that our close-outs and our prop businesses are a little bit lower.

Also, I think we've been pretty conservative with our shipments for May.

It's the first month of fall.

We haven't taken any of those orders yet.

So at this point we're being a little bit cautious about the fourth quarter in the U.S.

Great.

Just one final one, Pam, if I might.

I guess with 1.7 billion of cash, and this might come back to Phil as well, with 1.7 billion in cash can you maybe remind us and sort of update us on your thought process around parameters and acquisition criteria for Nike, Inc., as you look forward?

Well, I think one of the things we don't want to do is let the cash burn a hole in our pocket, and our whole deal on acquisitions is does it add is there a synergy with it and can we manage it.

And I think that with the most recent acquisitions of Converse and Starter that we really think it fits in with our strategy, and -- but managing those brands is going to be difficult, particularly managing them internationally, and they're both international brands.

So we're not going to let it burn a hole in our pocket.

I think we've said in the past that we'll look at acquisitions if they make sense that we'll have -- we have a fairly aggressive stock buyback program and we have obviously increased the dividend, so, you know, now that we have the cash to do those things, I don't think we should be marked down for it.

Great.

Thank you very much.

Thanks, Bob.

We'll have our next question from John Shanley, Susquehanna.

Thank you and good afternoon folks.

Don I wonder if you can give us a little bit more insight into the type of growth initiatives you were referring to that may be accelerated going forward based on the Company's strong financial position and perhaps an indication of the time frame that those initiatives may be implemented?

Right.

I don't want to get into too much granular detail, for, I think, obvious reasons, but we like the business trends, we're looking at in places like China and Russia and Turkey, and, you know, to some degree, there are opportunities there to increase development of the business a little faster, and that means things like sales force and demand creation and, you know, there's geographic opportunities.

We also think, as I said, there's some category opportunities.

Charlie spoke to the women's business which right now we have some outstanding results that we're seeing so far but we think there's more growth opportunity there, and frankly we also believe that our trends in football have been -- talking about international football at this point, have been very strong and we think there's even more growth there for us.

So it's really around sales force, retail development, demand creation, those are the kinds of things that we think let us grow the business.

I'll add that we remain bullish on the core sport categories like I said in the U.S.A. and around the world.

So that's definitely going to fuel a lot of our growth.

Super.

That's very helpful.

Charlie, I had a question.

We were hearing a lot of really positive comments from U.S. retailers about exclusive Nike products, particularly in the footwear product category that's doing really well, where they are the only ones carrying that particular product line.

Is that a growth momentum and something that you see Nike doing more of as we go forward and also are the margins comparable to what you get from your more established in line product lines?

Yeah, John, I think, actually we've talked about this pretty consistently.

We've actually pulled that back considerably and I think that's what's driving a lot of the success of the things that are out there.

I think we're going to continue to manage it with a pretty tight reign.

We feel great about the new technology platforms that we've got coming down the line that Mark talked to in the prepared remarks.

We'll continue to use that tool when and where it's appropriate but I wouldn't see it as a, you know, an expanding part of the product mix.

And the margins?

The margins in most cases now, with it used on a limited basis, are every bit as healthy as the in-line margins.

I think when we over use those tools that's when you start to see the margin erosion and the productivity and profitability erosion that we saw in the late 90s, early this decade.

I'll just add too, the exclusive and limited product is a very powerful tool.

We see that.

But it has to be used very surgically and very carefully.

So as Charlie said we're trying to keep a balance and really make sure that the focus is in our in-line product.

That's understandable.

Mark, what were the ASPs in the U.S. footwear in the just concluded quarter versus the corresponding quarter of a year ago?

Average selling price?

Oh, what's the time?

Yeah, what was it -- you mentioned you're seeing growth in ASPs.

What was the ASP?

I can't give you the specific number.

I'll just say it's been as healthy as it's been over the last probably year, year and a half.

We've seen a continued trend for multiple quarters and this quarter was as strong as we've seen it.

Okay.

Great.

John, the high-end performance footwear that Don I think pointed out in his comments that's where we're seeing our successes.

Super, guys.

Thanks.

And we'll have our next question from Virginia Genereux with Merrill Lynch.

Thank you.

Charlie, you mentioned that 90% of the business is on the supply chain systems.

How much margin opportunity would you guys say you have left in the U.S. where you keep, you know, you keep delivering margin up side here, sort of in the U.S. and then where do you see the kind of non currency related margin opportunity internationally related to supply chain, if you could just talk about that for a moment.

Well, I think, Virginia, in the current model that we're running right now the U.S. is probably as healthy as any of our financials worldwide.

I think they've done a -- you guys have seen it, they've done a fantastic job managing their inventory levels down, growing gross margins, the close-out businesses is back in the appropriate levels that it should be.

And so as we continue to work off of the current business model I think there's a little bit more up side, but we've got to be sensitive to the overall pricing structure of the marketplace.

I think where the differences lie is if we change the way we approach the market and the way we develop product, the way we bring it to market, that is unlimited, and I think as we look out towards the future those are some of the things that we're working on.

On a global basis I think there's still a considerable amount of up side, that being said, where we've seen the most pressure is more in the elasticity of the market at retail and making sure that we continue to drive profitable business at both wholesale and retail to keep the energy and the industry moving in the right direction.

Virginia, I just wanted to amplify, too, I think as Charlie said, the U.S. has done the best job of any of the regions in terms of keeping the inventories tight and reducing the close-outs.

So I think the U.S. is getting pretty far down that particular curve.

The thing the U.S. though still has lots of opportunity on and we've talked about is gross to net management, as an example, reducing claims.

We think there's still opportunities in the product cost itself which is working back the supply chain into the factory base, so as Charlie said the U.S. is pretty far down the track on the close-out management but there's lots of levers to pull.

And then all of those levers still have opportunities in the international regions.

Great.

Thank you, Don.

And then if I may, sort of a follow-on, the old discussion of sort of, you know, higher inventories and some clearance dollars in Europe and Asia, you obviously dealt with that very effectively but as you look out in those 2 regions how would you characterize the sort of inventory environment and do you have any sense that, I don't know, retailers in some of these, you know, tougher markets lately might need to cut back on orders, I don't know, for next spring or fall?

How do you guys think about that?

Are you talking -- Virginia, just to be clear, are you talking about the overall health in each of those regions from an inventory level perspective?

Yeah, Pam, I'm talking about sort of inventories in the channel and whether any of your major markets, yeah, retail, might have to cut back on wholesale orders from sort of industry wide.

Well, Virginia this is Charlie.

I think -- I'll take Europe first.

We're very comfortable right now with our European footwear position from an inventory standpoint.

We are a little heavy in apparel and we've seen that, you know, affect some of the orders going forward.

We feel pretty good about the product line as we look out and pointing towards World Cup '06 so I think Europe will sort through its problems, Asia is a much more, you know, country by country conversation, you know, China we're just trying to keep up, and it's moving along quite nicely.

We're very pleased with the progress that was made in China.

Korea we've talked about in the past and we're going through a little bit of retail cleanup there, we're starting to see some great progress made within the retail channels, so that's encouraging.

And as I talked to a little bit in my prepared remarks, Japan footwear is -- I wouldn't say it's slowed down but it's stabilized a little bit in a sense that we've seen unbelievable energy coming out of Japan over quite a sustained period of time.

And I -- at some point in time that was going to slow down a little bit, so we've seen that start to happen.

We feel good about our business in Japan and we think we're gaining market share at a considerable pace there.

So overall it's almost a case-by-case basis but I think on a global scale I'm very pleased with our position right now and where we're headed.

Great, Charlie.

Lastly, Don, if I may, you made a comment, I think answering Bob, you said that you guys were thinking we're going to try to be maybe a little more conservative in Q4 in the U.S. in May.

Is that just you thinking, looking back at a very strong spring here or did I sort of misread that?

No, it's really around how our shipments play out.

We feel great about the demand curve we've got in the U.S. and around the world.

In fact, that means we've got to manage our capacity and timing of shipments very carefully and we don't have visibility yet to that May period because it's the first month of fall so we'll have a lot better visibility in 90 days when those 6 1orders are already in and we'll see how fall is shaping up and we can give you a better sense of that on the next call.

Okay.

Great.

Thank you.

We'll have our next question from Noelle Grainger, JP Morgan.

Hi, there, is Phil still around?

Yeah, he's still here.

Trying to get rid of him?

I'm going to leave right after this question.

I just wanted to say congratulations on very good timing.

Yeah, thank you.

But curious if you might be able to share with us what your priorities are going to be as Chairman going forward.

Well, I think, you know, the next 6 months are going to be a challenge for the organization.

As optimistic as I am I wouldn't underestimate how difficult this is going to be.

But basically Nike has a very strong culture and this is going to be the hardest time, is this 6 months and so I'm committed to making this work, and I expect to be here full-time making that work.

I think it will work, and I think, again, I think it's, in many ways, because of the unique personal characteristics of the key people involved.

And then beyond that I think that obviously that I've -- I think I've shown my commitment to the Company and it's not going to go away.

I think one of the things we are trying to do, is we've had a couple of people drop off the Board of Directors, we're looking to get that bigger, and I have some key additions to that.

And I think that they will be working with Bill and Mark and Charlie and special projects and do what -- couple things I do best I've said is second-guess, and the other one is managing by mettling, so I will be doing a little of all of those things.

I'm sure they look forward to it.

One other question, if I could, which is just, on Europe, and I think heading into this year you guys talked about kind of reinvesting in that business.

And you've delivered a couple quarters here of pretty solid constant dollar top line and, you know, 260 basis points on margin so I'm wondering kind of where you stand with reinvesting.

I assume it's happening, and that it's offsetting some of that gross margin and, you know, whether you think the current kind of constant dollar growth is sustainable.

Yeah, Noelle, this is Charlie.

We talked about a couple of things with respect to Europe going forward.

I think part of it is the reinvestment and the other thing is how we continue to manage the brand in the marketplace that supports the growth that we're looking for.

One is the investment will continue to come in different forms.

Central European, Eastern European infrastructure development is moving along nicely, and we like where we're headed there and the response that we're getting in those markets.

From a demand creation standpoint and a brand position standpoint a lot of work going into retail presentation and going beyond football.

We pretty much kept our eye on the ball -- football there for 5 years running, 6, 7 years running now, and I think it's time to start to spread our wings a little bit with respect to how we manage the brand.

And then I think the other thing, we talk a lot about the core sports business but the active side of the business in Europe is every bit as important and as influential worldwide as some of the football and other sports so we see some great expansion opportunities on that side.

Certainly some of our competition has done well in that arena and we think there's a big piece of that business that we deserve and could do a much better job executing again.

So when you stop and think about how we can still grow in Europe I think it's brand positioning and football and going beyond football.

As far as core sports we talked about the women's fitness initiative and running as 2 specific categories.

There's still a lot of geographic expansion.

This whole active life piece of the puzzle gives you 3 very significant growth opportunities to key into, and so we're pretty excited about Europe.

It's a little bit of a retooling period right now but I'm feeling great about the progress that we're making.

I think, Noelle, just to address the economics of what Charlie was just talking about, I think what the investment does continue in the margin lines and, you know, if you play out the foreign exchange benefit that's out there, some of that is flowing through and some of it is being reinvested in the marketplace and I think you are seeing some of the benefits of that reinvestment.

We've got some of the markets in western Europe are now starting to strengthen and we've had a pretty continuous level of growth coming out of central Europe so I think the way you should think about it going forward economically is we're going to continue to invest in those marketplaces and we think we can continue to grow it.

I would just add one last thing, Noelle, is in the most recent NPD figures our number 1 market share position in football is sustained in the most recent numbers and in performance football on the pitch we have now crept to within one point of our good friends from Germany and feel like things are going really well there and we're looking forward to the next year, year and a half.

Have some of your efforts outside of football started to yield some benefits in those data points?

Yeah, very much so.

I mean, our running business and the running category, Mark talked a little bit about it in the remarks, we've seen some great response to that both on the technical higher end as well as some of the active life businesses, and then we're pretty excited about the women's fitness area.

Great.

Thanks a lot.

Thank you.

We're going to have to pick up the pace because we're about to run out of time.

We'll go next to Margaret Mager, Goldman Sachs.

Hi, how are you?

Hi, Margaret.

Great quarter.

I have a question for Phil on a couple of things he said.

First of all, the other brands if they can get to 25% of the business that would be more than double, say, over -- you tell me the time frame.

I'm wondering if that can be done with what you have in the portfolio currently or if you -- if that incorporates additional additions to the other brand piece of the business.

And then secondly, talked about all the opportunities that Nike has.

What would you be advising Bill Perez on Nike's biggest challenges and what issues should he be tackling?

Well, I mean, first of all, again, my comments on 25% are not a forecast, it's a state of mind but, yes it was looking at the kind of portfolio that we have now and saying what is the potential of Cole Haan, what is the potential of Converse what is the potential of Starter and also to a lesser extent I suppose, Hurley and Bauer, and we think all of those are growth areas that have performed very well last couple of years but on the -- for quite a period of time some of those have been a little undermanaged, so a lot of -- more attention can be paid to those and we think that we can get a lot of effort out of it so we think that that whole area has a lot of room to grow, so -- but, yeah, I was limiting to what we have now, and so -- then the other thing, we asked about Bill, but I don't remember what it was.

A lot of talk about lots of great opportunities for Nike but what would you say to your new CEO?

What are the biggest challenges or, you know, issues that you may advise him to tackle?

Well, one of the nice things, and we've talked about this more than once, is that he not only doesn't have to do anything, we hope that he doesn't do anything early on, that -- listen and learn.

And I think that he's got -- he doesn't have to come in here and make some dramatic business decisions in the near term, so his real challenge is to listen and learn and get acclimated to this very unique culture.

He's coming from a unique culture which is not totally different from ours.

It is different but it's also got some of the same sort of strong sense of personal involvement with the company, and so I think that's an advantage, but he will have to listen and learn, and then I think that basically it's how we attack this future to get the most out of what we've got and we think there's a lot of room to grow.

I'll pass the mic to the next speaker.

I have a few follow-ups.

We'll take one more question.

We'll go next to Jeff Edelman UBS.

Thank you, good afternoon.

I'll try to be quick.

Charlie, got a question on the increased penetration in the U.S.

You've expanded distribution channels, or let's say you've put more Nike product in some of your existing distribution channels.

Has sell-through been sufficient to pretty much maintain that level of inventory or now with the expanded product at Footlocker and Finish Line do we see some of the others contracting somewhat?

Well, Jeff, I think, first of all, we haven't put that much more product into the pipeline.

What you're seeing is more success at the higher end and aggressive improvement in average price per unit so we don't really feel like we've put that much more product into the market lace.

As we've talked about over the last couple of years, we're very sensitive to how much market -- or how much product we do put in the marketplace and really trying to maintain a strong brand position and what we call a pole of, you know, pole environment.

That being said I think that you continue to see more consolidation at retail.

Athlete's Foot filing this last week.

We lost Foot Action last year.

There's only so much room in the malls I think right now.

What we are seeing is and what I've been talking about for the last year, year and a half, and really energizes my experiences in the U.S. is, you know, the new independent retailers that are starting to emerge, and our ability to manage those retailers and manage the marketplace with that group is exciting, and I think the other thing that's continues to grow is the dot-com business and Nike ID is a part of our business that we don't talk very much about but we're very excited about the future of that opportunity and you've seen some of our on line efforts with the new Nike Women's catalog and some of the other things that are going on.

So as Phil said, I still believe that there's a lot of room in the U.S. market for us to grow, and we certainly don't have dominating market share percentages in any category, if you think about where we're at that other consumer product brands enjoy, that -- there's still a lot of up side for us.

There's a lot of companies out there over the last 5 years that have got to be over a billion dollars in our sector, that quite frankly we think is an opportunity for us to go after.

Okay.

Then just jumping to Europe, the success you've had in central Europe and eastern Europe, has this been one of really getting product into distributors is it one of getting into the retail stores?

Or are we looking at pipeline fill, or are we now starting to see this moving out through the consumer sector?

Well, first of all we own all of our own distribution so we're no longer working through any distribution third party infrastructure in central Europe so that's been a big change.

To some degree you can say there is some pipeline, you know, management going on and pipe filling going on but what I believe is you're seeing an emerging market and an emerging economy that is coming out of central Europe driving demand, and if you spend any time in central Europe they're every bit as sports fanatical as any other culture in the world and we're just starting to tap into that, building infrastructure, building distribution, making product more price accessible to that part of the world.

Jeff this is Phil.

Just one other thing.

I mean, basically is the pipeline full or not full, and, you know, you've got tens of thousands of retail accounts around the world that are trying to get a measure on all of that but for me the simplest number is the futures number, because that isn't -- what happened in the last 6 months that's what they predict -- the retailers are predicting is going to happen in the next few months.

All right.

Good point.

Thank you.

All right, thank you everybody for joining us, and I wish all of you a very happy holiday season and a wonderful new year.

We'll talk to you soon.

Happy holidays, everybody.

Bye-bye.

That does conclude today's conference call.

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