Nike Inc (NKE) 2006 Q2 法說會逐字稿

Good afternoon, everyone.

Welcome to Nike's fiscal 2006 second quarter conference call.

Today's conference is being recorded.

For those of you who need to reference today's press release, you'll find it at www.nikebiz.com.

That's www.nikebiz.com.

Leading today's call will be Pamela Catlett, Vice President of Investor Relations.

Before I turn it over to Ms. Catlett, let remind you that participants of this call are going to make forward-looking statements based on 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 filed with the SEC, including Form 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 and at-once orders, which may vary significantly from quarter to quarter.

In addition, it's important to remember a significant portion of Nike, Incorporated's 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, participants may discuss non-GAAP financial measures, a presentation of comparable GAAP measures, and quantitative reconciliations can also be found at Nike's website.

This call might include discussion of non-public financial and statistical information which is also publicly available on that site, www.nikebiz.com.

Now, I'd like to turn the call over to Pam Catlett, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good afternoon, everyone, and happy holidays.

Thank you for joining us today to discuss our second quarter results.

Nike issued our results about an hour ago.

And for those of you who need to reference the press release, as the Operator said, you'll find it on our website at www.nikebiz.com.

Most of you know that we've been evolving our conference calls to streamline our communication, and to appropriately address the topics that are most important to you.

We're very excited about our portfolio's performance and we want to highlight some key drivers in more detail.

So we're mixing it up today with a slightly larger group than usual.

First, we'll hear from our soon-to-be-a-Nike-veteran, CEO, Bill Perez.

Bill will give you his perspective on Nike and his thoughts going forward.

Then we'll hear from Don Blair, Nike's Chief Financial Officer, who will review our results.

Finally, you'll hear from both Mark Parker and Charlie Denson, Co-Presidents of the Nike Brand, who will each share their perspectives on the Nike Brand and business.

After that, we'll look forward to taking your questions.

Now, it's my pleasure to introduce Bill Perez.

Thanks, Pam.

As I approach my first anniversary, I guess I'm about to lose my rookie status and qualify as a veteran.

But as a rookie or not, I continue to be very excited about the growth opportunities for the Nike Brand and our Nike, Inc. portfolio.

And one of my primary missions as CEO is to make sure this Company has the right strategies in place to sustain long-term growth and, ultimately, double the size and value of our business.

And while I'm not going to give you an exact date, I can tell you that we've set the bar for ourselves very high.

During the past 10 months, I spent much of my time working with our senior leadership team on an exhaustive strategic review.

We've carefully analyzed the growth opportunities and the profit potential for each of our businesses.

And the conclusion was that, for the most part, we have the right game plan.

Nike has an extraordinary amount of growth opportunities in product categories and consumer segments, in developed and developing markets, in sports performance, and in sports culture.

Our multi-brand portfolio adds to those opportunities, giving us the ability to reach consumers at all price points, in all channels of distribution.

The review has deepened our confidence that our core strategies, particularly for the Nike Brand are right, and that our long-term growth aspirations are achievable.

But while our strategies are sound, the review also showed us how we can further improve our growth and profitability drivers, and how we can be even more competitive.

So while you won't see radical change, you will see refinements in how we are managing the business.

In emerging markets, we'll be more aggressive.

Markets such as China, Brazil, Mexico, and India are evolving rapidly and the opportunities for Nike are great.

We're accelerating our investments in those markets to make sure we are building strong, profitable, long-term businesses, and to put it simply, we want to own those markets.

We will be more aggressive and focused in our direct-to-consumer business.

We are in the process of creating a more consistent global strategy that will allow us to exploit our Internet connectivity, use Nike stores worldwide to elevate the brand, create closer consumer connections, and close distribution gaps.

Now the above said, as has been the case in the past, where possible, our distribution strategy will continue to be anchored to our retail trading partners.

In the Nike Brand we are also looking at ways to better align our business around consumer and category segments without losing product focus.

We have major opportunities to grow in sport performance and sport culture, and we are evolving how we align our business to support this.

In categories and countries where we are underperforming relative the opportunity in competition, we are driving improvement with renewed energy and commitment.

In our operations, we are driving greater efficiency.

This is a company-wide focus to simplify, streamline, more strategically use our resources, and scale for greater competitive advantage.

We are committed to better leveraging operating expenses while continuing to invest in growth.

For example, we are keeping non-retail headcount at current levels, while still supporting growth areas.

We will continue to hire where we need to, but we will do that by assessing where we can trade out positions.

And while we may have some exemptions, the exemption process will be painful for those seeking the exemption.

In our Nike, Inc. portfolio, we are more aggressively leveraging opportunities to share resources, drive collaboration, and amplify growth opportunities.

For example, our Exeter Brands Group is now managed as a division of Converse.

Exeter will greatly benefit from Converse's operational capabilities and expertise.

As I said, we are not focused on radically changing our game, but we are focused on getting better, stronger, and even more competitive at the game we're already playing.

Our game plan gives us ample opportunity and clearer sense of focus.

Product innovation and demand creation will continue to be our cornerstone.

We will sustain the strength of our performance business.

We will accelerate our game in emerging markets, sports culture, and women's.

We will more aggressively pursue a direct-to-consumer business, and we will improve our position in the value segment.

And we will fund our investments by better managing the portfolio, holding the line on operating expenses, protecting our gross margin and reallocating demand creation.

As I said in the past, Nike's greatest challenge is not related to the identification of growth opportunities, but it is, rather, one of focusing on those that afford us the greatest long-term potential.

Now what I'd like to do is turn the floor over to Don, who will review our second-quarter numbers with you.

Don?

Thanks, Bill.

Well in the past, we've told you about how we manage our global portfolio businesses to deliver consistent growth in a dynamic business environment.

While the second quarter of fiscal 2006 certainly threw us quite a few curve balls, we delivered very strong growth in revenues and profits and continued to invest in our business.

Although the marketplace continues to evolve rapidly, we remain confident that we can deliver our financial growth goals for fiscal 2006.

Our revenues for the quarter grew 10%, to a record $3.5 billion.

Changes in foreign currency exchange rates accounted for about 1 point of the growth in the quarter.

This revenue growth was slightly higher than we'd expected, due to strong demand in the U.S. and Latin America.

Diluted earnings per share for the quarter were $1.14, up 18% versus fiscal 2005, reflecting the strength of the top line and SG&A leverage, partially offset by lower gross margins.

Versus the prior-year quarter, our consolidated gross margin fell 60 basis points, to 43.5%.

Currency changes contributed about 150 basis points of improvement, but this was more than offset by lower footwear product margins in every region and lower apparel margins in Asia.

The erosion in footwear margins was somewhat more rapid than we expected but continued to reflect the factors we've discussed before -- investments in product value in Europe and Asia; higher input costs, primarily oil; and additional production and transportation costs to meet the strong unit demand for footwear around the world.

The mix of products sold in the quarter also drove gross margin lower.

While gross margins for the quarter were lower than we'd expected, this was largely offset by more modest growth in SG&A, as some demand creation moved to the back half of the fiscal year, and we tightened operating overhead.

Overall, we delivered 50 basis points of SG&A leverage in the second quarter, and are committed to delivering SG&A leverage for the full year.

Futures orders scheduled for delivery from December through April grew 2.5% versus the prior year, as changes in currency exchange rates reduced the growth by nearly 5 points.

Excluding the impact of currency changes, futures grew 7%.

In the first half of fiscal 2006, we also continued to generate strong cash flows, as we delivered $566 million of free cash flow from operations.

We repurchased $390 million of our stock in the first half of the fiscal year, and we paid out $130 million in dividends.

For the 12 months ended November 2005, our return on invested capital was 24%, consistent with the prior quarter end.

With that perspective on our consolidated performance, I'll now give you some additional depth on our results.

In our European region, which includes the Middle East and Africa, revenues grew 2% in Q2.

Currency did not have a material impact on overall revenue growth for the quarter.

Apparel revenues advanced 2%, and equipment revenues were up 9% for the quarter.

Footwear revenues were flat with the prior year.

Constant dollar revenue growth for the quarter was driven by high-teens growth in the emerging markets in the region, partially offset by lower revenues in Western Europe.

As you know, the retail environment in Western Europe has been challenging for some time.

Over the past year, we've gained both apparel and footwear share in that environment.

Still, in the second quarter, we began to see some of the weaker trends our competitors have reported in recent quarters.

In addition, our revenues and futures reflect steps we've taken to turn away some business we do not believe reflects positively on our brand.

Gross margins in our European region expanded 40 basis points for the quarter, contributing about 0.1 of a point to our consolidated margin change.

The benefits of more favorable currency exchange rates, and a lower level of closeout sales with better margins were offset by pricing and product investments in consumer value, and increased product costs related to higher commodity prices, and costs to meet strong worldwide demand, particularly for footwear.

Reported second-quarter pre-tax income for the European region was $194 million, a decline of 2% versus fiscal 2005.

The decline for the quarter was driven by mid-single-digit growth in SG&A expense, partially offset by higher revenues and gross margin.

We continue to believe that our European region, in general, and Western Europe, specifically, present tremendous growth opportunities for the Nike Brand.

On a year-to-date basis, revenues for the region are up 4% versus fiscal 2005, and pre-tax income is up 18%.

And over the second half of the fiscal year, we expect constant currency revenue growth to accelerate, as our World Cup marketing programs drive sales of footwear, apparel, and equipment.

In the Asia Pacific region, revenues increased 4% in the second quarter, with about 2 points of the increase coming from stronger currencies in the region.

Excluding currency effects, footwear and apparel each reported 2% growth, while equipment grew 9%.

China was again the primary driver of the region's revenue growth, as our business there grew strongly.

This growth was partially offset by weaker results in Japan, Korea, and Australia.

Of these markets, the most significant and the most difficult has been Japan, where constant currency revenues declined at a single-digit rate in the second quarter.

Our footwear business there has been affected by an overall lack of excitement in the market and intense promotional activity at the lower price points.

Our apparel business also underperformed.

Our approach has always been to build product lines that deliver compelling consumer value up and down the price spectrum, rather than simply discounting higher-end models.

As we've discussed on previous calls, new footwear products designed to strengthen our position at lower price points will debut in Japan next month.

We're also working hard to improve our apparel lines for this market.

While futures for the December to April period are positive on a constant currency basis, we believe there's a great deal more we can do to realize the full potential of this critical market.

Charlie will talk more about that later.

For the quarter, Asia Pacific gross margin fell 240 basis points, reducing our consolidated gross margin by 30 basis points.

Higher product costs, increased customer discounts, and product value investments in Japan drove the reduction.

Pre-tax income for the quarter grew 3%, to $115 million, as lower SG&A spending offset the lower gross margin.

The Americas region continued to deliver outstanding results in the second quarter, as revenues grew 33%.

Stronger currencies in the region contributed 13 points of that growth.

While Argentina and Brazil were the largest contributors to the revenue increase, every country in the region posted higher revenues.

Gross margins were flat for the quarter versus the prior year, and pre-tax profit for the region increased 30%, to $57 million.

And that brings us to the U.S. region, which once again delivered a terrific quarter.

The U.S. team added $175 million in revenue for the quarter, a 15% increase, driven by broad-based growth across most channels and wholesale accounts.

Nike-owned retail also performed strongly, as overall sales increased 15% and comp-store sales for Niketown stores increased 5% for the quarter.

Overall, footwear revenues grew 19%, and apparel revenues increased 13% in the second quarter.

Equipment revenues decreased 8%.

The outlook for the U.S. remains bright, as futures orders for delivery between December and April rose over 9% versus the year-ago period.

Consistent with the past few quarters, U.S. footwear was the most important driver of our growth in revenue and profits in the second quarter.

In Q2, wholesale unit sales increased over 20%, driven by growth in both sport performance and sport culture products for men, women, and kids.

Unit sales advanced up and down the price scale with more rapid growth at the middle and lower price points, reflecting a more effective product offering at those levels.

For the five-month futures window, both units and average price per pair were higher than the prior-year period.

U.S. apparel grew 13% in the second quarter, despite a decline in licensed apparel sales, due to the expiration of our NBA license.

Our last significant sales of NBA apparel were made in the second quarter of fiscal 2005, so we are now beyond this drag on our results.

A significant contributor to our second-quarter growth in both footwear and apparel revenues was the Jordan brand, which grew almost 50%.

Recognizing the limitations of POS data in this industry, for the 12 months ended November 2005, Jordan footwear reached a 6% share of the overall U.S. footwear market, up 1.8 share points year-over-year, and within 0.9 of a point of the number-four brand in the U.S.

Gross margins in the U.S. fell 170 basis points for the quarter, reducing our consolidated gross margin by 70 basis points.

Most of the decline was attributable to footwear, due principally to higher commodity costs and additional supply chain and factory costs to meet strong unit demand.

For the quarter, pre-tax profits for the U.S. region grew 14%, to $266 million, and strong revenue growth and SG&A leverage more than offset lower gross margins.

For the quarter, revenues from our Other businesses grew 14%, to $435 million.

While each of these brands posted higher revenues for the quarter, the increase was driven by growth of nearly 40% at Converse, and high-teens growth for NIKE Golf.

Pre-tax income for the Other businesses was $23 million in the second quarter, up 11% versus fiscal 2005.

Bauer NIKE Hockey posted a loss for the quarter, as we absorbed costs related to the recently-announced rebranding initiative.

Excluding current and prior-year results for Bauer NIKE Hockey, pre-tax income for our Other businesses advanced 19%.

Consolidated SG&A spending for Nike, Inc., grew 8% in the quarter driven by an 8% increase in demand creation and a 9% increase in operating overhead.

For both components of SG&A -- demand creation and operating overhead -- currency changes accounted for about 1 point of the increase.

The increase in demand creation was the result of sports marketing investments in the U.S. region, Nike Brand advertising in Europe, and Converse advertising in the U.S., and higher spending on retail development around the world.

As we expected, the growth in operating overhead slowed in Q2.

In addition to the impact of currency, the increase in operating overhead for the quarter reflected a contribution to the Nike Foundation, which accounted for 2 points of growth.

The balance of the increase, about 6%, was due primarily to increased personnel costs and investments in Company-owned Nike and Cole Haan retail stores.

For the second quarter, we reported net interest income of $6 million, versus $4 million of net interest expense in the prior-year quarter.

The improvement was due to both higher levels of invested cash and higher interest rates.

Other income nets for the second quarter was $1 million, versus $8 million of other expense net in the prior-year quarter.

The largest factor in the improvement was the swing from foreign currency hedge losses in fiscal 2005 to foreign currency hedge gains in the current year.

The net effect of the improvement in these foreign currency hedging results and the translation of foreign currency denominated profits from our international regions was approximately $20 million of additional pre-tax income for the current-year quarter versus the same quarter last year.

Our effective tax rate for the quarter was 35.1%, bringing our year-to-date rate to 34.7%, in line with our current estimate for the full year.

Our November 30 balance sheet continued to reflect the financial strength of the Company.

As of that date, our balance of cash, cash equivalents, and short-term investments totaled $2.1 billion, or about $8 per diluted share, while our total interest-bearing debt was about one-third of that amount.

As of November 30th, worldwide inventors were 10% higher than a year ago.

Over half of the inventory increase was in the U.S. and Americas regions, where we continue to experience very strong demand.

A large percentage of the worldwide increase represents spring footwear product in transit, including our new Air Max 360.

Worldwide closeout inventories were unchanged versus the prior year.

In that prior year, our inventory levels were relatively low, as factories worked to meet our strong unit demand.

As we built our capacity to meet this demand, deliveries from the factories have improved, and our inventories in transit increased.

As we anniversary these unusually low inventory levels in the coming months, we expect inventory growth to ease.

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

When viewed in conjunction with the 10% revenue increase we reported today, this reflects outstanding receivables management from our field finance teams.

Our success in delivering consistent financial growth in a dynamic global business like athletic footwear and apparel depends on our ability to make adjustments to our financial model as market conditions change, and change they have.

Since our last conference call, Western Europe and Japan have become more challenging, due to weaker currencies and overall business conditions.

In addition, we continue to see cost pressure on our gross margins, as we work to supply the strong unit demand and product input costs remain high.

As we face those challenges we're taking steps to invest behind those businesses that have strong momentum, to accelerate those businesses that have slowed, and to adjust our spending to fund these initiatives and deliver our financial goals for fiscal 2006.

For Nike, Inc., we're still expecting high, single-digit revenue growth for the full year, with mid-single-digit growth over the balance of the year, reflecting our current futures and a less favorable currency outlook.

The third-quarter growth should be stronger than the fourth quarter, consistent with the phasing of our futures.

We anticipate the gross margins for Q3 and Q4 will be below the prior year, with variances similar to that of the second quarter.

For SG&A, we've delivered 110 basis points of leverage so far this year, and remain committed to delivering leverage for fiscal 2006 as a whole.

As we indicated earlier, we're committed to investing our resources in critical business initiatives and driving productivity elsewhere to fund those investments.

We anticipate that demand creation will grow faster than revenue for the balance of the year and the full year as we invest in revenue-driving initiatives, such as the World Cup, China, and Nike Pro.

We expect this will be offset by significant leverage in operating overhead spending.

Overall, SG&A spending should grow at a 5 to 7% rate in each of the third and fourth quarters, with Q3 growth more toward the top of that range.

Interest income should be relatively consistent with first-half levels, but other income for the last two quarters of the fiscal year should look more like Q1, as our current FX forecast would result in more income from our currency hedges.

In summary, we're very confident we're in position to deliver our financial goals for the year, and position ourselves for continuous growth in the future.

So with that, I'll turn the floor over to Mark Parker.

Thanks, Don.

And good afternoon, everyone.

As you heard, we had a solid second quarter, particularly in the United States and the Americas and in markets such as China and Central Europe.

Retail in Western Europe and Japan is challenging, but globally, the Nike Brand is strong, with energy across both the sport performance and sport culture sides of our business.

I could give you many examples today of the power of the Nike Brand around the world and the close connections we're creating with consumers, such as our incredible Zoom LeBron III launch in China and the United States -- our biggest signature shoe launch in five years, kicking off with a $250 Limited Edition Zoom LeBron III that sold out in two hours in China.

Fantastic sell-throughs all around on this product, as well as Carmelo Anthony's Melo 5.5 from Jordan, and Dwyane Wade's signature shoe, the WADE, from Converse.

There's also great momentum in sell-throughs in our Nike Pro apparel and our women's fitness businesses, with each being up 80% and 19%, respectively, year to date.

We're seeing strong sales at Nike retail, including our new Nike store on the Champs d'Elysees in Paris.

At our Run Americas 10K event, a record 80,000 runners across seven countries in Latin America, which drove our Nike Shox footwear and Nike Sphere apparel businesses.

These wins and many others drove our great results in the second quarter, but I'd like to spend my time today on what's ahead for Nike, which is even more exciting.

We began fueling the World Football energy in the second quarter.

The Limited Edition launch of Ronaldinho's Golden R10 boot in October generated tremendous consumer and media response, and drove growth in our Tiempo line.

The relaunch of our Hi-Vis Soccer Ball also was a big success.

Our Brasil 5-Star Sport Culture apparel collection generated strong sell-throughs globally.

And year-to-date, our global football business is up double digits, driven by our performance on field products.

We're extremely excited and confident about our strategies as we build towards our most integrated campaign ever, and the launch of our entire World Cup product line in the coming months.

We're very pleased with retailer response to product we've already are showing.

Consumers all over the world will see Nike with many of the game's most exciting players, including Player of the Year, Ronaldinho; and with the world's most exciting teams, including reigning champion and five-time World Cup champion Brazil.

Building Nike into a global soccer brand has been an incredible journey.

In 1994, soccer was a $40 million business for us, practically an afterthought.

Today it's approaching 1.5 billion, a premium core business for us, and a critical source of brand strength around the world, amazing growth built through performance-based product innovation, and getting close to our consumers -- the strength of the Nike Brand.

We're quickly approaching our goal of being the world's leading soccer brand.

There's more to come as we launch our most integrated campaign ever in the third quarter and unveil our entire World Cup product line.

Between now and when we report our third-quarter results, many of your questions about our strategy and products will be revealed.

We have great momentum heading into next summer's World Cup, and we'll continue to build more and more energy in the months ahead.

And you'll see this momentum continue through World Cup '06 into the next football season and beyond.

Looking ahead, our strong, high commercial potential innovation pipeline and upcoming global events, such as the Winter Olympics give us ample opportunity to grow.

Nike Pro will have a significant presence at the Winter Games, as we -- as will our newly-unified NIKE Bauer Hockey brand.

We're creating state-of-the-art uniforms for 16 countries, outfitting teams across nine sports, including ice hockey, speed skating, and bobsledding.

We're also outfitting 6,000 NBC employees in specially designed Winter Olympics outdoor gear.

Innovation continues in footwear this spring, with the launch of the Air Max 360, which will bring new energy to our entire Nike Air line. 26 years after the debut of the Nike Air technology, and then the introduction of our first Air Max shoe in 1987, we've fulfilled the original promise of creating a great performance running shoe with 360 degrees of Nike Air cushioning.

Air Max 360 has no mid-sole foam, just pure, 100% Nike Air cushioning, supporting a great-looking performance shoe.

Air Max 360 embodies our commitment to product performance and innovation.

We'll also be announcing some very dynamic and high-profile partnerships in the spring that will advance our product innovation possibilities and deepen consumer relationships with Nike.

We're very proud of what we've accomplished so far this year and very excited about what's ahead.

We'll stay focused on what we do best -- consistently delivering innovative products, rooted in and inspired by performance, and creating close connections with our consumers, further strengthening and leveraging our tremendous brand and business potential.

Thanks, and now I'd like to turn it over to Charlie Denson.

Thanks, Mark.

Good afternoon to everyone.

Happy holidays and my condolences to you who are sitting in New York facing a little tougher commute home tonight.

As Pam mentioned up-front, our goal on these calls is to focus on a few topics beyond the financials that we believe are important.

Don, Bill, and Mark have both given you their perspectives.

So I'd like to round out today's discussion by first giving you a little deeper insight into what we see going on in the global marketplace, which is, as always, has its challenges.

We call them opportunities, and they're offset by some areas where we have great momentum.

If there's one sound bite I'd ask you to take away from me today, it is that the Nike, Inc.'s, global portfolio is working.

For the last several years we've talked about how our long-term success is reliant on our ability to manage a growing and diverse portfolio.

As we continue to navigate a changing global marketplace, we have great momentum and brand strength in places like the U.S.A., China, and throughout South America, and our subsidiary units are growing above the corporate rate.

What I'd like to cover should sound pretty familiar to most of you that have followed us over the last several years.

It's our ability to deliver financial results driven by certain segments of the portfolio, while specifically addressing issues where we may have parts of the business where we have a big opportunity.

Today you've already heard about our strong financial results.

I'd like to address parts of Western Europe and Japan.

Let's talk about Europe first.

We continue to see strong double-digit growth coming from Central Europe, as our apparel business accelerates across the continent as we approach World Cup, and we're addressing some of the strategic initiatives that will give us a strong brand position in a very tough, macroeconomic landscape.

It's not formulaic, but our ability and history of looking at each marketplace through the consumer's lens addressing product, marketing, and distribution strategies that are aligned is a well-documented approach.

We have talked about some of these strategic initiatives in the past, specifically distribution and the Sport Culture consumer.

These are the two areas that I think you will see some strong, long-term benefits from in the near future.

It's no secret that France and the U.K. have been the two toughest markets to grow in.

We have taken a strong position of both markets to pull some of our premium performance products out of distribution we feel is not brand-enhancing.

It's having some short-term effect on our numbers, but we feel in the long run we will continue to build a strong, premium brand position with premier brand presentation and new and innovative product introductions.

We have also experienced some challenges with inventory management, both at the account level and in the regional apparel area.

We feel we are on the back side of this and are starting to see some improving marketplace conditions regarding the Nike Brand in the near future.

The other big strategic opportunity in Europe is the emerging Sport Culture consumer.

You could say they've already emerged in this marketplace, becoming influential within youth culture.

And we've been a little slow to address their demand, mostly in the low-profile footwear area.

We've been doing a lot of work here.

And you may have seen our initial effort in women's over the last six months, with some of the most exciting product on the marketplace.

The Shox Rival, the Sprint Sister and the Blade were great performers of retail, and it's just the start.

We have an entire product assortment rolling out over the next several seasons in both men's and women's.

Turning to Asia, we reported another solid quarter, as rapid growth in China continued to drive the region's results.

Our China business remains a star performer, and we continue to see stop line -- top-line growth rate that is among the best in our portfolio.

We continue to open new doors at a rapid pace, with over 2,000 doors as of the end of this quarter.

We're at a point in our growth where we are expanding our reach past the big three -- cities of Beijing, Shanghai, and Guangzhou -- and are opening doors in the next tier of populated cities.

But as we've made clear in the past, we do not view China as a race to Beijing in 2008.

Our goal is to build a profit and sustainable, long-term business in this exciting, new market, with as little near-term risk as possible.

We're very pleased with our progress, and we feel great about our current brand position in the fastest growing market in the world.

We are number -- we are the number-one brand in size, recognition, and overall performance.

We have some great plans for the future, indicated by Mark's -- what Mark talked about, the most recent launch of the China-only LeBron model, and it's just the start.

In Japan it's a different story.

We continue to see a lack of energy from the broader retail environment, with retailers focused on price to drive product.

Our strategy here is not dissimilar to what I just mentioned about parts of Europe.

We're not chasing the business, and we're keeping orders tight to protect the brand, while we reinvest in the longer term growth opportunities we see in this market, things like NIKEiD, our custom footwear platform, a more competitive approach to the price-value relationship in product, and an aggressive innovation agenda that will energize the Japanese consumer are things that we ultimately think will make the difference.

We're confident as we evaluate this market, align our strategies and product communication and distribution that we will maintain our position as the leader in athletic footwear and apparel in this critical and influential marketplace.

So the bottom line is this -- we're very pleased with the state of our business.

The health of the Nike Brand portfolio in the U.S., South America, Central Europe, and China is strong and profitable.

Our subsidiaries are performing well, and give us an additional ability to manage the portfolio and deliver our financial goals.

We'll continue to make the right investments, take a long-term, proactive approach in markets like Western Europe and Japan, which still represent significant growth opportunities for the Nike Brand.

The World Cup represents a great check point for us, but in no way do we believe it's the finish line.

We are very excited about the balance of '06 and the opportunities that we have in '07 and beyond.

With that, we'll open up with questions.

Thank you.

Thank you, everyone. [OPERATOR INSTRUCTIONS] We'll go first to Robert Drbul with Lehman Brothers.

Hi, good evening.

Hi, Bob.

A couple of questions.

First one is on the footwear product margins, can you talk a little bit more about your expectations, what happened this quarter?

Elaborate a little bit more in terms of the lower product margins in every region?

And, I guess, as you look into the back half of the year with some of the comments you made around gross margins, what are the risks that you still see on the gross margin side around footwear products?

Okay, Bob.

First of all, a lot of the factors we've already talked about.

So just to reiterate what the major drivers have been, we are seeing higher commodity costs, primarily oil.

There have been some changes in minimum wage laws in Asia.

We've seen some impact from that, as well.

So that's one of the prime drivers in footwear.

A second key element has been that our unit demand has been just tremendous.

You noted, with our results for this quarter, the U.S. posted over 20% growth in unit sales in footwear.

So, as we built our capacity for servicing all of that unit demand, that has increased our cost somewhat.

That's related to things like adding additional tooling sets and moving to additional factories to produce product.

So it's a bit of a good news, bad news in the sense that we've got such great unit demand.

Sometimes our margins are little bit lower.

We've also seen that we've had to move the product over here, and we've had some higher air freight numbers.

So those are all product cost drivers.

We see those basically being somewhat consistent over the back half this year but easing as we go on into '07, as long as commodity prices stay about where they are.

A second major driver this quarter was the mix of products.

We did see some shift and mix to the U.S., which has lightly lower footwear margins than, say, Europe.

And we did see a little bit of mix shift into some product types, like Sports Culture that tend to have slightly lower margins.

So on that front, that's very hard to predict.

At this point we think, as we said in the guidance, the third and the fourth quarters are going to look somewhat like the second.

And, then the last item that we talked about is the investments we're making in product value in Japan and Europe.

And we will largely anniversary those come fall of 2007.

But, obviously, the decisions we make around pricing are very dynamic, and we look at each market individually.

Okay, great.

And, just a question on the futures.

When you look throughout the period that you have, did it significantly change from the first half of the period to the second half of the period?

Yes.

The futures are stronger in the front half of this window that we're reporting today.

We do have some timing, as Mark mentioned.

We do have some phasing of our World Cup product introductions.

And we do believe we're going to see some acceleration as we go into the fourth quarter, particularly in Europe.

But the futures we reported today are definitely stronger in the front half of the window.

Great.

Thank you.

Yes.

We'll go next to Virginia Genereux with Merrill Lynch.

Thank you.

Maybe two questions.

On the SG&A side, Don, you and Bill talked about several initiatives.

Should we think about, as we look out further, should we think about you guys sort of getting back to this objective of other overhead growing at half the rate of revenue growth?

And demand creation growing at the rate of revenue?

Or could, really, the other overhead, I guess, be even better than that?

That's one.

Well, I think directionally the comment that we want to focus our investment in SG&A on demand creation that directly drives revenue as well as operating overhead that directly drives revenue, that is definitely true.

I would suggest that the absolute percentage is not something that you might want to model out exactly like that, but definitely we expect to see a lot more leverage on the operating overhead side than we would on the demand creation side.

And overall, we are committed to delivering SG&A leverage over the long term.

And, secondly, on the -- on the sort of balance sheet capital structure, you guys are just generating so much cash, even as you buy back a ton of stock.

Any -- just -- should we just think about you guys doing more that?

I know you raised the dividend substantially as well.

But the levers, the priority levers, again, are still sort of dividend share repurchase and then lastly acquisitions?

Any sort of change in that thinking, too?

Thank you.

Virginia, this is Bill here.

And we're obviously very cognizant of the -- I think it's $2.1 billion of cash sitting on the balance sheet today.

And we've discussed this with the finance committee of the Board.

And I hope some of the things we've done haven't gone unnoticed.

We did increase the dividend by 24%.

I think we repurchased close to a $0.25 billion of the stock during the past quarter.

And 18 months into a four-year buy-back plan, we've already repurchased about 1 billion, just under $1 billion of a 1.5 billion target.

So our forward thinking will always be based on generating the highest return for our share owners, whether that be increasing our dividend, repurchasing stock, or investing in higher return opportunities.

And with regards to your specific question about acquisitions, as we indicated in June, we have ample opportunity to grow with our current portfolio.

We're not actively pursuing acquisitions.

If the right opportunity present itself, we would take a look at it.

But that's not a priority.

Thank you, very much.

And we'll go next to Liz Dunn with Prudential.

Hi, good evening, I guess.

My first question relates to, it sounds like you're saying that you'll have a bit more spending discipline and really monitor that in -- within a quarter or two, determine how much you can spend.

I mean, it sounds to me like this quarter, for instance, your gross margin was a little bit light of expectations so you turned off the spigot a little bit in terms of demand creation spending.

Is that the right way to think about it?

And then how do you -- how do you manage that versus sales growth if you do realize that demand creation ultimately drives sales growth?

That's my first question.

And then my second question is, why are gross margins in the back half expected to be similar to Q2 if you have a benefit of 150 basis points from currency in Q2 and won't have that benefit in the back half?

Thanks.

Okay.

Well, with respect to your first question, Liz, we definitely do not manage the business on a quarter-to-quarter basis.

And what we're really aiming for here is managing the portfolio over a period of time to deliver great results for our shareholders and build the business for the future.

So it's really a question of the balance of profitability today, and long-term investment going forward.

What I did want to communicate is that I think what you saw in the second quarter was our ability to pull the levers.

The demand creation spend is not a tool that we use to manage the P&L.

It is really a phasing based on what we think makes the most sense for driving the business.

And the impact you saw in SG&A is really a longer term initiative to wring some more productivity out of our operating overhead spending, and you started to see that in the second quarter.

And we are committed to continuing to deliver that over time.

So you should definitely not think about this as a quarter-to-quarter exercise.

Okay.

But I had in my models that you had Q2 SG&A planned up 15%.

Was that -- ?

Well, yes.

And we did perform better than our guidance on SG&A in the second quarter.

And that does reflect that we've redoubled our efforts around driving productivity and operating overhead.

But we're not doing this in terms of turning the spigot on or off for any given quarter.

We just don't manage the business that way.

And your second question, Liz, was around gross margin?

Yes, just because currency benefit won't be there for the back half.

Or at least that's the guidance you've given us in the past.

So why is gross margin expected to be down only similar to Q2 when you did have a currency benefit in Q2?

A lot of it has to do with the mix of products we expect to sell.

For example, in many of our markets, as we sell World Cup replicas, apparel, that tends to be a higher margin product than some of our in-line products.

Same thing for some of the footwear.

So there's a large number of moving parts in the gross margin equation.

At this point, with a neutral currency environment, we do expect to see roughly the same year-over-year change in margin, but it's really related more to product mix and geographic mix.

Okay.

Thanks.

Congratulations on a great quarter.

Thank you, Liz.

We'll go next to Omar Saad with Credit Suisse First Boston.

Thanks.

I wanted to ask a little bit -- for a little bit more detail on some of the comments Bill made up front around the retail strategy.

I know he mentioned that distribution is still going to be anchored to the retail partners.

But wanted to get a better flavor for what -- what some of the strategies will be there on a global basis, especially any plans to move outside the outlet format to create retail environments appropriate to the brand.

Omar, as I mentioned before, we're in the process of setting a strategy for our direct-to-consumer business.

And I see significant opportunity, or an opportunity to significantly increase our online business.

I think we have an opportunity to create retail concepts that elevate our brand and close distribution gaps in a number of markets.

But as I said earlier, our preference is always to partner with retailers who do a good job of presenting our brand.

And, I don't know, Charlie, do you want to add to that?

Yes, no, I'll jump in on this a little bit Omar.

I think one of the things that we've talked about over the last several years is our ability to partner with some of the key retailers around the world.

And that strategy doesn't change.

And we continue to emphasize that as -- I think that Bill made reference to that in his comments.

That will be the cornerstone to our retail strategies.

I think what we do have the ability to do is take on and look at ways to change the landscape of the retail marketplace with very specific and strategic executions of opportunities that we may have come available to us, whether it's a real estate play or something like that.

I think a great example of that is the Champs d'Elysee store that we've opened up on a very key and significant street in a very important marketplace worldwide, where we can control the entire brand presentation and focus on some of the pieces there.

So I think those are -- those are some of the key points that we want to make sure everybody understands on the retail front.

We will continue to look at opportunities, as we've discussed in the past.

But we are still anchoring most of our retail distribution strategies with partners around the world.

Yes, I just want to add -- this is Mark speaking.

I want to add, too, that we're going to continue to invest in our, as Charlie said, our key retail partners.

A great example in this past quarter is some of the work we did around Pro and the Pro Revolution doors we opened up with some of our better sporting goods partners.

We've found that that not only helped the tremendous sell-throughs on the Pro product, but actually helped lift our entire apparel business in just about every category.

So that's a great example of a key investment in our -- important retail partners against a big initiative for the Company.

Great, thanks.

Appreciate that.

We'll go next to John Shanley with Susquehanna Financial.

Good afternoon, folks.

Hi, John.

Charlie, I wonder if you could give us a little bit more of a time horizon on the challenging markets that you did a nice job in highlighting for us, markets like Japan, France, and the U.K.

Those are major markets for Nike, in terms of it's a national presence.

And I'm assuming that you've already pre-lined most of those markets for the fall '06 selling season.

Can you give us an idea if the market environment, from your conversations with retailers, is starting to turn?

And whether or not you see some opportunity as we get further into calendar '06 in terms of the business opportunities, particularly as we get into the important fall selling season in those markets?

Yes, we have done some pre-lining, John.

We're not quite that far into it, although we've -- most of the major accounts have seen the product line.

I think that the two big pieces of -- areas that I highlighted in the prepared comments are areas that we're really excited about, and that's getting after this Sport Culture consumer piece, which is a dominant -- becoming a much more dominant piece of the puzzle in the European market.

And, then, I think, also, the overall perspective on distribution and making sure that we continue to build a premium brand position over the long term.

And in some cases, I think this has a little bit of familiarity with the conversations we had around the U.S. marketplace three, four years ago.

So I think we're -- we're still very optimistic about growth potential coming out of the European marketplace.

When that's going to turn around, I'm not quite ready to predict some of the economic challenges that that overall marketplace faces.

We are seeing some very strong results coming out of some very specific parts of that market, specifically in Italy and to some degree in Iberia.

I think the other thing that we feel great about is the fall product line and, again, moving through World Cup and into the fall season, wen the football product is really the most relevant.

And part of the product launches that we have staged will, I think, will put us in a great position to take advantage of that.

So it's not -- it's not -- I'm not ready to say we're completely around the bend.

But I really like what we're doing in Europe right now.

I'm very confident and comfortable with the strategy and plans that we have in place.

With respect to Japan, I think it's a little bit different, the marketplace is a little bit healthier.

And, as I said, again, in the remarks, we are going to -- we're going to make sure we manage inventories there, we're not going to put ourselves in a position where we're going to chase bad business.

We think we have a great opportunity to introduce more energy to that marketplace through product and innovation.

Mark referenced the Max 360 product, which we're very excited about this next spring.

And we got a couple more things in the hopper, up our sleeves, that, quite frankly, we're not ready to talk about, but I think they will be very exciting pieces of the product assortment going forward, and Japan will be a fantastic market for some of these products.

That's very helpful.

And the last question I had is really directed at you, Bill.

We've heard from a number of the retailers that we follow, whether it's athletic specialty chains or sporting goods, or even family footwear retailers, that Nike has been reaching out more and, particularly, you, yourself, has reached out more to a lot of the retailers to better partner up with them.

Is this a change in terms of the approach the Company's relationship with its retail partners?

And is this something that's being motivated by, basically, the organic growth of the U.S. market versus maybe some of the market conditions in the other areas?

Or is it just that you see an opportunity to just continue to ramp up your market share position in this country?

I think, John, it's pretty consistent with what we've talked about before.

In terms of retail, we always start with retailers who can help us elevate the brand, handle the brand properly.

And we always attempt to work with them in the first place.

I've gone out to meet people to understand our customers, understand their needs, try to understand how we can fit our plans in with theirs and create a synergistic situation.

We're also working with a number of retailers to access their data, because I believe if we have access to their data and we have a growing number of retailers in our database now with online point of sale information, I think we can -- it can be a win, win -- we can increase consumption for them and we can increase consumption of Nike product, as well.

But it's not a change in strategy.

I think it's a long-standing strategy.

It's just an opportunity for me to get to know people better.

Do you think Nike can grow its market share position, you're by far the dominant factor in the market.

Can you continue to grow, even though you basically have such a large position already?

John, we only have a 25-share market in the US.

We can double it.

I don't want to be quoted on that, but we have ample opportunity to grow in the U.S. in footwear and in apparel.

Okay.

Fair enough.

Thanks.

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

Hi.

Hi, Margaret.

Hi.

I have a couple of questions.

I -- a little bit of clarification, I guess.

Are you expecting SG&A leverage in the second half of this year?

And how do you go from a 2 to 3% futures order to a mid-single-digit sales growth in the second half of the year?

And why is it that the futures orders slowed into the -- into the fourth fiscal quarter?

What caused that?

Okay.

First question was SG&A leverage over the back half of the year?

Yes.

I do not expect SG&A leverage on the back half of the year.

I do expect SG&A leverage for the full year.

We are currently 110 basis points I believe levered through the first half of the year.

And as we said before, some of our demand creation is more backloaded.

So on the full year, we do expect to get leverage, we're committed to that.

I don't necessarily expect that in the second half.

Your second question is -- How do you get from current futures to mid-single-digit?

One of the things to bear in mind is that the futures window does not include the entire fourth quarter.

So we do expect to see some good numbers coming out of our fall bookings that fall into May and some of our May numbers.

We have some early indications, so we think we're going to see some acceleration there related to the World Cup and some other product initiatives that we have in the pipe.

We also have quite a bit of at-once and replenishment business that's done very well for us so far this year.

That will also improve our revenue growth over the back half of the year.

And your third question, I believe was why the deceleration in futures?

And the first point I'd make is that a lot it's foreign exchange.

When we reported it, the first quarter, our expectations around the euro and the yen were much stronger than where they are today.

And if you take that out, our futures numbers for the five-month window is actually up 7%, which is pretty consistent with our long-term growth model.

We have seen a little bit lower number in the U.S.

The U.S. was a plus-12 last time we reported.

We think plus-9 is very, very good for that market.

And, as I said earlier, some of the phasing of some of the World Cup product means that we expect to see some of those sales come in in the back half of the quarter.

Last thing I'd say is, if you think about the fundamental business health here, I want to highlight, again, the strength of our unit demand curves.

We are seeing enormous growth in units which says we're really doing well in terms of share of feet.

And I think that our profitability picture across the portfolio is pretty good, and we're very confident on hitting our goals for the year.

Okay.

Did you say that European apparel was an area of opportunity as you look forward?

What were the challenges in European apparel, especially with the World Cup?

I would think European apparel would be one of your strongest businesses?

And how does Nike Pro factor in there?

Hi, Margaret.

This is Charlie.

Hope you're feeling better for the holiday.

Yes, me, too.

No, what I said was that our apparel business is accelerating in Europe.

So as you've talked -- as you know, we've talked about some of our apparel inventory issues over the last couple seasons.

And we feel pretty good about the progress we've made in getting the inventories back in line, and then, as you've mentioned, accelerating into the World Cup.

We're very excited about both the product that has been laid out for the World Cup tournament itself, and we've had pretty strong response going into fall.

I think the other thing that's -- that is adding a lot of energy into the European apparel market is the Nike Pro equation.

And we've had a great response to Nike Pro over there.

I don't know if you've been over there recently, but that team has done a fantastic job of placing that product, and the consumer has responded very well to it.

So it's an accelerating environment for our European apparel picture.

A couple of other areas I'd add just to that would be the women's fitness.

We just had a great round of sell-throughs on our women's fitness and fitness dance product over this past quarter.

And we expect that to continue through the spring.

Tennis is up quite a bit.

And our Sport Culture remains a big opportunity for us over there as well.

Okay.

Well, that's very helpful.

Thanks.

And have a great holiday to you, all, as well.

Thanks, Margaret.

Thanks.

Operator, we'll have time for one more question, questioner.

Thank you, very much.

We'll take our final question from Robby Ohmes with Banc of America Securities.

Thanks, guys.

Actually, just one question.

I was hoping, since the 360-degree Air launch is coming up in January, can you just walk us through the rollout process for calendar '06 regionally?

And also which channel partners we should be looking at as having more of a position with this product?

And also, can you give us some info on advertising?

And also, sort of, global launch versus what's going on in the U.S.?

It would be great, as well.

Thanks.

Yes, this is Mark.

Let me hit that.

The 360 launch, as you mentioned, it's in -- later in January.

As I said, we're really excited about that, not just from the excitement around that single model, that product, but the plan that we have around re-energizing our whole Nike Air collection.

And that's really the vanguard product, the spotlight product that we want to rally behind for Nike Air as a total collection of performance product.

You'll see that expanding as we move into spring, into fall, into other product categories, 360, that is.

The next category would be basketball.

And we expect to actually have a full product offering, both on the sport performance side of the business and the Sport Culture side of the business.

You'll see some pretty exciting things happening at retail on the Sport Culture side starting as early as January of this year.

The primary initial introduction, the thrust will be in the U.S.A. and Japan -- I'm sorry, in Asia Pacific, and then you'll see Europe picking that up into late spring, into the fall season, as well.

So Europe will sort of follow that wave a bit as we head beyond World Cup.

You'll see a much bigger emphasis on that from Europe in that fall season, although they're trying to see what we can do in Europe leading up to the World Cup effort, as well.

Hi, Rob, this is Charlie.

Just as far as the channel -- I'm not going to get into specifics, but to Mark's point, I think you'll see that the product globally -- and in all the -- all the major key retailers around the world, the high-end product will be on a limited basis availability, which is traditionally the way we've launched most product innovations.

And then, as Mark relayed and talked about, the -- it's not just about a single shoe.

It's an entire concept.

And you'll see -- you'll see products throughout the product line.

Yes, and on the advertising, as well, I didn't mention that.

We kick off with a -- in the U.S.A. with a national TV campaign later in January.

We will carry that through the spring season.

We'll have energy -- energy account-based product exclusivities and some energy-type events happening, digital online activity.

It's really a total of what we call "360 marketing" campaign around the shoe.

And the -- and the broader Nike Air line.

And from a futures perspective, is this something that, sort of, you're going to limit allocations in the spring, but it could have a meaningful impact in your futures as you move toward back to school '06?

Or is this something we got to wait to '07 before it really becomes meaningful to futures?

Well, I think -- I mean, we will limit it at the top end, as we always do.

But we see that as a positive, and part of driving the whole demand creation around the concept.

I think as we move into the first half of '07, it's going to become a significant part of the product offering and we're excited about some of the new products that we've started to pre-line with some of the accounts worldwide.

Yes, I think the thing you have to remember is this isn't a single shoe launch.

This is an effort around Nike Air at large.

So you'll see some broader distribution of products within Nike Air, beyond or relative to the 360 product itself.

So this will -- you'll see some impact on this initiative this spring, and it will certainly build through next fall.

Yes, just to clarify, Robby, fiscal '07 is what Charlie was talking about.

So we do expect to see some impact for fall.

Terrific, guys.

Thank you, very much.

Thank you, Robby.

And, thank you, everyone, for participating.

We wish you all a very safe and happy holiday season.

Talk to you soon.

This does conclude today's conference call.

We thank you for your participation.

And you may disconnect at this time.