Nike Inc (NKE) 2007 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to Nike's fiscal 2007 fourth quarter conference call.

For those of you who need to reference today's press release, you will find it at 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 me remind you that participants of this call will 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 Forms 8-K, 10-K, and 10-Q.

Some forward-looking statements concerns future orders that are not necessarily indicative of changes in total revenues for subsequent periods, due to the mix of futures and at-once orders, exchange rate fluctuations, order cancellations and discounts, which may vary significantly from quarter to quarter.

In addition, it is important to remember a significant portion of Nike Incorporated business, including equipment, most of Nike retail, Nike Golf, Converse, Cole Haan, Nike Bauer Hockey, Hurley, and Exeter Brand Group are not included in these future 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 also include discussion of non-public financial and statistical information, which is also publicly available on that site at www.nikebiz.com.

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

Thank you.

Good afternoon everyone.

Thank you for joining us today to discuss Nike fiscal 2007 fourth quarter results.

We issued our results about an hour ago.

If you need to reference them, you can find our press release and the reconciliations the operator mentioned on our website, as well as the prepared remarks at the conclusion of the call.

Joining us on today's call will be Nike Inc.

CEO, Mark Parker, followed by Charlie Denson, President of the Nike brand, and finally you will hear from our Chief Financial Officer, Don Blair, who will give you an in-depth review of our financial results.

Following their prepared remarks, we will take your questions.

As it is year end, we have a lot of ground to cover, so we would appreciate you limiting your initial questions to two, so that we can allow as many of you as possible to ask questions.

In the event that you have additional questions after your first two, we would ask that you please requeue, and we will do our best to get back to you.

Thanks for your cooperation on this.

It is my pleasure now to introduce Nike Inc.

CEO, Mark Parker.

Thanks, Pam, and welcome everybody, to our year-end call.

We just finished another strong year at Nike, and let me start with the big numbers.

Net revenue for the quarter was up 9%, that is 23 consecutive quarters of year-over-year revenue growth.

For the year we added nearly $1.4 billion of incremental revenue to total $16.3 billion, up 9% year-over-year.

Global futures are up 11% on a constant dollar basis.

EPS grew 34% for the quarter and 11% for the year, even as we absorbed over $140 million of incremental expense under new stock option accounting rules.

All of this is in-line with our commitment to deliver consistent, profitable growth.

The Nike brand had a very good year, every region saw fiscal year revenue and futures increase.

More on this from Charlie in just a few minutes.

The Nike subsidiaries had a tremendous financial year, growing revenues 16% on the year.

The big story here is Converse, which continues its white hot performance.

Revenue increased 23%, PTI increased 133%.

The Chuck Taylor All-Star franchise continues to have terrific sell-through of every model, whether we design it, or consumers customize it for themselves.

In fact, Q4 was the biggest global sales quarter ever for Converse.

We just opened a branded space on Carnaby Street in London to tremendous consumer response, and we expect the continued international expansion of Converse to be just as successful.

Next year is the 100th anniversary of Converse, so you can look forward to some special concepts to pop up in celebration of the brand.

Clearly, we see Converse continuing to deliver strong growth.

Nike Golf continues to perform exceptionally well.

We extended our leadership as the world's #1 golf apparel brand.

We moved into the Top 3 brands in drivers in the U.S., and finished the 2006 PGA tour with the most wins in drivers, irons, fairway woods, and wedges.

On the year revenue from Nike Golf grew 12%, and pretax income grew 33%.

In total, our six subsidiaries delivered a combined annual revenue of $2.3 billion, and PTI essentially doubled to $304 million.

We saw record revenues in PTI for Converse and Hurley, record revenue for Cole Haan, and record PTI for Bauer Nike Hockey.

Every sub has a team and the tools they need to accelerate their performance, and collectively contribute 25% of our portfolio growth over the next four years.

I am very bullish on the subs.

To convert our financial performance to value for our shareholders, we continue to optimize the business.

We delivered $1.6 billion in free cash flow from operations last year, up almost $300 million versus prior year.

By deploying cash effectively in fiscal '07, we increased dividends 20%, bought back $975 million in stock, and increased ROIC 80 basis points, excluding the expense of stock options.

I said a year ago that inventory levels were unacceptable, that they would improve over the fiscal year, and take their rightful place relative to revenue and futures growth, and we have kept that promise.

For Q4, inventory growth was 2%, a decrease from the 15% year-over-year growth we had last year, and far below our rate of revenue growth.

Another big part of our growth strategy is our focus on retail.

We have talked for a while now about retail consolidation, and the effects of sameness in the malls.

I think any lingering resistance to change in our industry is gone.

We are jumping on that opportunity to lead change.

We have had a very productive year with our wholesale partners, exploring new ways to more effectively elevate and differentiate their stores.

We are moving ahead with Nike-owned concepts, to bring an entirely new experience to our consumers, and you will see some of those concepts come to life in early spring.

And expanding our digital footprint, we are building and tapping into online communities based in the passion for sport, we are expanding the tools consumers use to customize their products online, we are going to use our digital brand tools to do what we did with traditional advertising, to innovate, entertain, and lead consumers to products that only Nike can create.

Retail, both partner and direct, physical and digital, will continue to differentiate Nike from our competitors, deliver premium experience to consumers, and challenge and energize the industry.

Our performance and our goals are both based on our exceptional management agility.

As we move into the new year, we are reorganizing the brand into high-growth categories, intensifying our focus in high-growth cities, countries, and regions, implementing a new vision for energizing retail through our partners, and through our Nike-owned concepts, and strengthening our leadership position in corporate responsibility.

We are a company with a lot of confidence, and that doesn't happen by accident or good luck.

We got here because we take a total performance approach to growth.

By striving to be the Best-in-Class in every part of the business.

We have a lot of competitive advantages and behind them all is our relentless pursuit of performance and innovation in product.

That is something you either have or you don't, you can't buy it, you can't fake it, all you can do is live it, and strive to get better at it every day, which is what we do.

So I will end where I started, we had a really strong year and we are well on our way to reaching our goal of $23 billion in revenue by fiscal year '11.

While our performance is outpacing that of the industry, we do not operate based on the gap between Nike and our competitors.

We are focused on the gap between Nike and our potential, because that is where real growth and true leadership happen.

Now I will turn it over to Charlie for a few comments on the power of the Nike brand.

Thanks, Mark.

And how about those Oregon State Beavers?

Back to back National Championships!

Congratulations to one of the local teams.

Hey, I wanted to start by picking up something Mark mentioned.

That is the retail environment we are in.

I think the challenges of consolidation and lack of distinction are clear to everybody, but we have been talking about these issues for a while now.

Our position has always been that of leadership and creating differentiation.

Athletic specialty has become the generalists of the industry.

We think it is critical to put the Specialty back into athletic specialty.

At the same time, we believe that the Nike brand has an opportunity be to better represented at the point of sale, and we have announced our intention to invest here.

A big part of that leadership will come out of our category alignment.

We now have these teams and leaders in place.

The teams have relocated and the leadership, product, marketing and operational support are all sitting together, forming the beginnings of a portfolio of world-class teams.

And I have to say, this is one of the most energizing things we have done around here in quite some time.

We have business plans being reworked, new consumer concepts beginning to take shape, and we have already started to create category and destination formats.

An example is our 'House of Hoops' concept at Foot Locker, stores that combine Nike basketball, the Jordan brand, and Converse, in a way that will create a new level of excitement for consumers here in the U.S.

It is an important first step in rolling out a series of new ideas that will impact specialty retail and influence the entire industry.

Let's stay with basketball for a minute.

The take outside the company is that the U.S.

basketball business is underperforming compared to its exponential growth from a few years ago.

That may be true for now, but we think it is only temporary.

Basketball is a sports and cultural phenomenon.

It is not going to go away anytime soon.

Inside Nike, we are very excited about the potential of basketball.

The game has gone global, and so has the business.

There is tremendous passion for basketball in places like China, Taiwan, and across Europe.

Non-American NBA players like Dirk Nowitzki, Tony Parker, and Manu Ginobili are bringing the game to a new generation of players and fans everywhere.

In China, there are millions of kids playing basketball today, and we are just beginning to establish a relationship with them.

So the potential is huge.

Here in the U.S., we hold home court advantage with some of the most exciting players in the game, LeBron, Kobe, Amare Stoudemire, and Steve Nash to name a few.

There is nobody more entrenched in the power of future basketball than Nike, and we are very excited about the game, and the business of basketball around the world.

Now let's go to soccer.

This is a category where footwear innovation drives competitive success, and we feel great about our new product launches as well as our innovation pipeline.

We just launched the fourth generation of our Total 90 boot three weeks ago, and it's generating great response from both consumers and retailers.

We have brought a carbon composite chassis and upper concept to the Mercurial Vapor Iii.

Let me explain that in layman's term, we made the shoe lighter.

That means on average, over a distance of 10 meters, the Vapor Iii was .05 of a second faster than our competitor's shoes.

To a player at this lever, the difference means an advantage of the length of one football shoe, that is huge in soccer, and we'll be advancing that technology for the Euro Champs in 2008.

By the way, as we look forward, our futures numbers are up strong double digits.

In Running, Nike Plus continues to expand beyond even our own expectations.

The Bowerman series it continues to catch fire, up 20% globally year-on-year.

The [New Mero 2] is one of the top selling shoes in running specialty shops this month.

We received nine editor's choice awards from Runner's World magazine over the last 18 months, including the International Shoe of the Year, the year of Pegasus.

Even with all that, the most exciting part of the running story doesn't come from the U.S., it comes from Europe, specifically Germany, home to half of the running business on the continent.

Nike is the fastest-growing performance brand in running in Germany, and we are now #2 after grabbing 4 points of additional market share in this last year.

We do plan on being #1.

I have been around this place for a while, and I have never seen our teams more excited and energized than they are today.

Around the world we continue to see tremendous opportunity in the key geographies.

The U.S.

continues to deliver consistent growth.

We hit $6 billion in revenue for the first time ever.

Footwear had its first ever $1 billion quarter in Q4, and for the year, Apparel passed the $1.7 billion mark for the first time.

It was led by strong sell-through of performance products, like our new Sports Essential line.

We are very pleased with the Asia-Pacific business, especially China, where revenue increased 29% in fiscal '07.

We are gearing up for the Olympics, but Beijing is just the beginning.

We believe that by 2009, China will be our second largest market in the world.

Our latest consumer data for China indicates that we have gained about 4 points of combined footwear and apparel market share in the last year, to add to our already-substantial lead.

In Japan, we are seeing some improving trends.

The team has done a lot of work over the last 18 months to improve our business and brand position.

Reduced discounting, a cleaner marketplace, lower inventory levels, and increased futures and sell-throughs are all signs of an improving environment.

In our American region, the big news is that in fiscal year '08, we will own our Brazilian apparel business rather than working through a licensee, and we are very optimistic about the impact of that new distribution model.

In Europe, our EMEA region is bouncing back.

Every country in the region saw growth in their future's orders, up an aggregate of 12.5% in real dollars, up over 3 percentage points from our last reporting.

And we cracked $1 billion in pretax for the first time.

It has taken some time here, but our discipline and patience are beginning to pay off.

We are seeing a much cleaner retail environment across the region.

In short, we have had a great year, and we are off to a good start for '08.

I believe that we are ideally positioned for growth.

Our category focus is amplifying our connections with consumers, and the communities that they live and work in, and bringing a sharper focus to how we prioritize our business.

Mark spoke to our inventory levels, which position us well to grab market share in the short-term, and to leverage the power of our category focus to lead marketplace expansion in the long-term.

And we have great agility in the way we balance our portfolio of businesses to sustain global growth.

Now I am going to turn it over to Don to give you some detail on the numbers.

Thanks, Charlie.

As Mark told you earlier, we delivered another year of strong, profitable growth in fiscal 2007.

For the year, revenues grew 9% to over $16 billion, and we delivered double digit EPS growth, even after the change in stock option accounting.

Our balance sheet is stronger than it has ever been, and with futures orders up double digits, and great momentum in our affiliated brand businesses, the Nike portfolio is well positioned to deliver continued growth in fiscal '08 and beyond.

Revenues for both the fourth quarter and fiscal year grew 9%, with 2 points of growth from currency changes.

All three of our product business units, and all four of our geographic regions delivered revenue growth for the year.

Revenue for the businesses reported as Other grew 16% for the year, and contributed 2 points to our overall revenue growth.

Futures orders scheduled for delivery from June through November 2007 grew 12% versus last year, as all regions reported strong growth.

Excluding currency changes, futures were up 11%.

Diluted EPS for the quarter were $0.86, 34% higher than last year.

As expected, EPS growth for the quarter was boosted by comparisons to prior year earnings, reduced by World Cup demand creation, and the Converse arbitration ruling.

For the year, diluted EPS were $2.93, up 11% versus fiscal 2006.

Excluding the impacts of stock option accounting and the Converse arbitration, EPS would have grown 15% for the year, within our target growth range.

Gross margins for the quarter were flat to the prior year, as initiatives to improve gross margins offset higher product costs in Asia, and higher closeouts.

For fiscal 2007 as a whole, gross margins were slightly below last year.

For the full year, reported SG&A grew 12%, and as expected, the timing of demand creation spending, and the change in stock option accounting created significant swings in SG&A growth over the course of the year.

Excluding the change in accounting for options, SG&A grew 9% in-line with revenue growth.

In fiscal 2007 we delivered $1.6 billion of free cash flow from operations, and paid out $1.3 billion to our shareholders, in the form of dividends and share repurchases.

For the 12 months ended May 2007, our return on invested capital was 22%.

Excluding the change in stock option accounting, our ROIC increased about 80 basis points versus the prior year.

So with that recap of our consolidated performance, let me now give you some additional perspective on our results.

In our European region, which includes the Middle East and Africa, fourth quarter revenues increased 12% with 9 points of growth from currency changes.

Currency-neutral footwear and equipment revenues increased 4 and 10% respectively, while Apparel revenues increased only slightly, versus a World Cup year in 2006.

For the year, revenues for the region grew 9% with 6 points of growth from currency.

On a currency-neutral basis, all countries in the region, except the U.K.

and France, posted higher sales.

As a group, the emerging market countries were up over 30% driven by strong results in Greece, Russia, and Turkey.

After a period of challenging conditions in the U.K.

and France, we have begun to see tangible signs of improvement.

Revenue growth accelerated in the second after of fiscal 2007, and futures orders are up 12%, driven by growth in every major country.

Fourth quarter pretax income for the European region grew 29%, reflecting leverage from lower demand creation spending, as well as stronger European currencies.

For all of fiscal 2007, the region delivered pretax income of over $1 billion, up 4% versus the prior year.

In the Asia-Pacific region, fourth quarter revenues increased 7%, with 2 percentage points of growth from currency.

Currency-neutral revenues for Footwear and Apparel both grew 5%, and Equipment advanced 6%.

For the year reported revenues grew 11% with 1 point of growth from currency.

For the year, most countries in the region reported double digit sales growth on a currency-neutral basis.

China's revenues increased over 25% and continue to be the primary driver of the region's increased revenue.

Excluding changes in the value of the yen, revenues in Japan were up slightly for both the quarter and full year, and we continue to see encouraging signs of a turn in that market.

Pretax income for Asia-Pacific grew 37% for the fourth quarter, reflecting the timing of demand creation spending, and expanding gross margins.

For the fiscal year, pretax income for the region grew 17% to $484 million, as revenue growth and better gross margins more than offset investments in China and Korea.

The Americas region reported flat revenues for the fourth quarter as tough World Cup comparisons, and softness in Brazil, offset positive trends elsewhere.

For the year, revenues grew 5% with 1 point of growth coming from currency changes.

Growth in all other countries in the region offset softer results in Brazil.

For fiscal 2008, we expect to return to growth in Brazil.

We are seeing some positive signs for Footwear, and as Charlie mentioned, we have begun shipping apparel for the fall season, following the takeover of that business from a licensee.

Fourth quarter pretax income for the Americas region grew 20%, primarily as a result of lower demand creation spending versus last year's World Cup campaign.

For the year, pretax income grew 9%, to $187 million, driven by higher revenues in gross margins, partially offset by investments in demand creation and infrastructure.

That brings us to the U.S.A.

Fourth quarter revenue for the region grew 10%, in part reflecting the benefit of shipment timing across quarters.

Sales at Nike-owned retail stores in the U.S.A.

grew 16% for the quarter, and comp store sales at Nike first quality stores increased 8%.

For the full year, revenues for the region grew 7%, as 9 of our Top 10 wholesale accounts grew.

Futures orders also increased 7% versus the year ago.

Revenue for U.S.

Footwear grew 9% in the fourth quarter, reflecting double digit growth in units, and a mid-single digit decline in average price per pair.

The reduction in average price per pair was driven by a shift in mix, to lower priced kids and sandals styles, as well as a higher percentage of closeout sales.

For the year, U.S.

Footwear revenues grew 6%, driven by high single digit growth in units, and a slight decline in average price per pair.

U.S.

Apparel revenues rose 11% for the quarter, and 8% for the year, on strong growth from performance and team apparel, partially offset by softer revenue from sports culture styles.

U.S.

Equipment posted fourth quarter revenue growth of 23%, driven by strong growth from our repositioned sock line, and higher sales of team sports equipment.

For the year, this business grew 8%.

Pretax income for the U.S.

region grew 20% in the fourth quarter, bringing full-year pretax income to $1.3 billion, up 4% for the year.

Favorable timing of SG&A spending drove strong P&L leverage in the fourth quarter.

For the full year, higher supply chain costs, and a larger mix of closeout sales reduced pretax income growth.

Fourth quarter revenues from our other businesses grew 9%, bringing full-year reported revenues to $2.3 billion, up 16% versus fiscal 2006.

For the year, revenues at Converse grew 23% to $564 million, driven by strong consumer demand, particularly outside the U.S.

Nike Golf also turned in a stellar year, as revenues grew 12% to $676 million.

Revenues at Cole Haan increased 8% to $471 million, driven by strong results at owned retail stores, while Nike Bauer Hockey, Hurley, and Exeter each grew revenues at a double digit rate, fueled by great products and brand momentum.

For the year, reported pretax income for the other businesses nearly doubled.

Excluding the impact of the Converse arbitration ruling last year, and the settlement this year, pretax income for the other businesses grew over 40%, driven by higher revenues and improved gross margins.

Fourth quarter SG&A spending for Nike Inc.

grew 3%.

Excluding the impact of stock option accounting and currency, SG&A spending fell 2%.

For the year, SG&A spending increased 12%.

Excluding the impact of stock option accounting and currency changes, SG&A grew 7%, in-line with constant currency revenue growth.

For the year, demand creation grew 10%, currency changes accounted for 3 points of that growth.

The remainder was driven by advertising campaigns behind Nike Air, Nike Plus, and Nike Pro.

Fourth quarter demand creation spending fell 10%, reflecting lower demand creation spending versus last year's World Cup campaign.

Operating overhead grew 14% for the year.

5 points of growth came from the change in stock option accounting, with an additional 2 points of growth due to currency changes.

Key drivers of the balance of the increase were investments in owned retail and non-Nike brands, as well as normal wage inflation and performance-based compensation.

For the year we reported net interest income of $67 million, $30 million more than the prior year.

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

For the fourth quarter, Other expense was $12 million, primarily due to losses on currency hedges.

For the year, we reported Other income of about $1 million, as gains from the sale of our Oregon distribution center, and the Converse arbitration settlement were mostly offset by currency hedge losses.

The combination of currency hedge losses and favorable translation of foreign currency denominated profits from our international businesses, decreased year-over-year pretax income by $11 million by the quarter, and $2 million for the year.

Our effective tax rate for the year was 32.2%, an improvement of 2.8 points over last year.

The tax rate reflects benefits from operations outside the United States.

Our tax rates for earnings from these operations are generally lower than the U.S.

statutory rate.

These benefits include a European tax agreement finalized in the second quarter of fiscal '07.

We are particularly proud of our cash flow results for fiscal '07.

Working capital management is one of the key drivers of our cash flow and return on invested capital.

In fiscal '07, we improved our cash conversion cycle by over eight days, driven by strong management of inventory and accounts receivable.

As Mark noted, year-end inventories were only 2% higher than a year ago, significantly below our forecasted revenue growth for the first quarter of fiscal 2008.

May 31 accounts receivable increased 5%, well below the rate of revenue growth in the fourth quarter.

So now that we have fiscal 2007 in the books, it is time to talk about our expectations for the new year.

As many of you recall, we introduced our long-term financial model in 2001.

We aim to create shareholder value by delivering high single digit revenue growth, mid-teens earnings per share growth, and improving returns on invested capital.

We are very pleased with our track record over the past six fiscal years.

We have compounded revenue at 9%, EPS at 18%, and increased our return on invested capital from 14 to 22%.

We remain focused on delivering sustainable growth in revenue and earnings, while continuing to use our capital efficiently.

For fiscal 2008, we expect revenue growth toward the top end of our high single digit target range, and modest growth in gross margins, as the benefits of clean inventories and continued progress on our gross margin initiatives offset cost pressures from Asia.

For the year, we expect SG&A to grow about in-line with revenue.

We expect to invest in demand creation to drive growth in product sell-through and in infrastructure, for direct retail and digital commerce.

We do plan to continue to leverage operating overhead spending against core functions.

We are also targeting ongoing improvements in our working capital efficiency.

We are planning for another year of strong cash flows, and expect to make significant purchases of Nike stock.

We will also continue to focus on achieving tax efficiencies across our global operations.

As a result, we estimate that our fiscal '08 effective tax rate will be 50 to 100 basis points below the fiscal 2007 rate.

At this time, we expect the growth model for the first quarter to be fairly consistent with the outlook for the full year.

So in summary, we are very pleased that we have delivered another year of profitable growth in fiscal 2007, and we're committed to continuing to do so in fiscal 2008 and beyond.

So now we would be happy to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS) We will go first to Robbie Ohmes with Banc of America Securities.

Please go ahead.

Thank you.

Two quick questions.

The first question is, can you tell us in the futures orders, can you give us the ASP breakout for the U.S.

and for Europe?

Then my second question is, can you give us for the U.S.

futures, any sort of sense on the relative strengths by channel?

Thanks.

Well, on the futures, Robbie, we are seeing still some slightly lower ASPs on the futures order book.

As we said earlier, most of that is really a mix-driven impact.

We are seeing pretty much consistent performance out of the very top end of our price range, but we are seeing very strong growth out of products like kids, and as I said, our sandal business has been really strong.

So a combination of those mix impacts, we are seeing a little bit of lower ASPs worldwide.

And then futures?

Well, then the other question was channel perspectives.

Yes, Robbie, this is Charlie.

I don't have the channel breakdowns in front of me.

I would say that it is pretty relatively strong across the board.

In the U.S., we have got strong performers in every channel.

So we have got people that are continuing to grow at a great clip and then obviously there is a few within each of the channels that are, I wouldn't say they are down, but they are not growing as fast.

So I don't, Pam might be able to get you some of the exact channel breakdowns after the call, but I don't have anything in front of me right now.

Just one last quick follow-up.

The category alignment that you guys a going through, when should we be thinking about when that would start to benefit your numbers?

Well, that is a great question.

We think it is starting to benefit them as we speak, in the way we are approaching the business and some of the decisions that we are making.

The first full-blown category led seasonal initiative will probably come to market somewhere around Spring '09 or Fall '08, but they are, the alignment is starting to inform our decision makings literally right off the bat.

Great.

Thanks a lot.

We will go next to Jeffrey Edelman from UBS.

Please go ahead.

Thank you.

First of all, Pam, could I get the channel breakdown also?

(laughter)

Charlie, first for you, as we think about the orders and as Robbie asked you about the channels, and we think about what you are talking about, the efforts to create excitement with some of the mall-based retailers, is that embedded in some of the futures growth?

Not really, not yet, because there is really nothing out there yet, other than some announcements and some directional arrows, so nothing is being reflected in the futures numbers as of yet.

We are still working on plans as to what it represents over the next 12 to 18 months.

Okay.

Don, could you sort of give us a sense why there is such a spread in the currency differential, between your fourth quarter sales and first half futures?

That is difference in the FX impact seems to be a lot greater than we typically see.

You mean on which one are you talking about?

We have about a --

I am sorry, European fourth quarter sales reported constant dollars, and then European futures reported constant dollars.

I am sorry.

I hate to ask you to do this.

Can you repeat the question for me.

Which two numbers are you trying to reconcile here?

The European orders were up 12% --

Going into the fourth quarter, is that what you are saying?

I am saying at the end of the fourth quarter --

Yes, okay, 12.5% on a reported basis, right?

And on a constant dollar basis, 11%.

Your fourth quarter revenues in Europe were up 12, and constant dollars were up 3.

You know what, Jeff, I think I am going to have to ask you to see if we can take this one to a different conversation, because I don't think there is a fundamental principal involved here, but I am not sure I can give you a good answer.

I am not sure I entirely understand your question.

Okay.

We will follow-up.

Yes.

Just to make sure that we are all clear on how we do this, obviously the way we do report futures numbers on a go-forward basis, is we use our estimate of what we think exchange rates are going to be.

That is obviously subject to a lot of fluctuation based on where the exchange rates actually land.

Okay.

Thanks.

We will go next to John Shanley from Susquehanna Financial Group.

Thank you and good evening, guys.

Charlie, you gave us a good insight in terms of the China business sales up in the quarter 29%.

I wonder if you could give us the same level detail in some of your other major international markets, specifically, the U.K., France, Germany, and Japan?

I don't have all the revenues in front, but I think the most important part that you are trying to get at, we have consistently talked about those markets as being challenges.

Let me take the U.K.

and France to start with.

Futures for both countries are up, so that is a first for us for a while, an encouraging sign.

I think in France we have got two successive quarters of revenue gain year on year, and we are starting to see a little bit of movement there.

Our inventory situations both at retail and obviously in Europe has improved over the last reporting period, and we feel very good about that.

So these things, we have been talking about the U.K.

and France for a while and they take time.

I feel like the French marketplace is probably in a little bit better shape with a little less volatility, but the U.K.

market shape is obviously a bigger market, and probably has a little bit more volatility right now than France, based on where we are at.

But both markets are improving, and I feel very confident in talking about that.

As well as in Japan.

I think in Japan the marketplace again, inventory levels are in very good shape, our sell-throughs are starting to improve, the promotional activity in the marketplace, certainly around the Nike brand is really becoming very minimal, and we really like our brand position, and our business position right now going forward.

So things in Japan have never really been that bad.

They just haven't been as good as we would like them to be.

I think Japan now is starting to come back into focus with respect to with the potential of that marketplace really is reflected.

That is great to hear.

John, just to give you the clarification, the U.K.

was down, France and Japan were both up slightly in the fourth quarter, and as Charlie said, futures for all three of those markets are up going forward.

Super.

Also, on the Ford order questions that have come up already, can you break down the Ford order position between footwear, apparel, and accessories for us at the end of the fourth quarter?

We don't usually do that, John, and we are not prepared to make an exception at this point.

Sometimes you do, sometimes you don't, but okay.

The last question I had, Don, wondering if you can clarify, you mentioned fourth quarter comps for the first quality retail stores were up 8%.

Is that just Niketown, and maybe you can just give us the comps for the outlet stores if it doesn't include those retail outlets?

Okay, well, the first quality stores for Nike income certain other concepts.

For example, we have got some women's stores concepts out there in the U.S., so that will be all of our first quality, but the overwhelming majority of that is Niketown, and the comp store results for the outlet stores were a little more challenging, consistent with what many of the other outlet retailers have seen.

But overall our retail business, particularly on the first quality side has been very strong.

We think that is reflective of the strength in the brand.

Were the comps in the outlet stores negative?

It was a challenging set of comp numbers, so yes, they were negative.

Okay, great.

Thanks a lot.

I appreciate it.

We will go next to Margaret Mager from Goldman Sachs.

Please go ahead.

Hi, good morning, or good afternoon.

It's Margaret Mager, congratulations on a great fiscal year, Mark, your first one as CEO!

Thank you, Margaret.

I have a few questions.

First, if I could just focus on the U.S.

market a little bit.

Is there any inventory in the channel that needs to be dealt with at all?

And how do you keep that balanced when you have got clearly disappointing results at two important customers?

If you could speak to that.

Secondly, could you talk about your apparel business, and I know you said sports essentials is driving it, but what else is going on in Apparels?

How is the women's business doing, and I know the Sports Essential is 40/60 cotton/noncotton.

What is your view of performance apparel that has cotton in it?

If you could talk about that.

And lastly, if you would please, when will Olympic marketing start to kick in in a significant way?

Thanks.

Okay.

This is Charlie.

Hi, Charlie.

Hi, Margaret.

I am going to try to go to the top.

U.S.

inventory, probably the U.S.

marketplace, I would have to say, is probably our best-managed marketplace around the world.

We have got the most resources, we have a full-blown outlet store piece of the puzzle in place.

So that team has gotten pretty dang good at managing the product flow and the inventory levels through the U.S.

market.

I think the key thing for us now is as we continue to do well here in the marketplace, and maybe some of the other competition starts to struggle a little bit, we have got to be disciplined enough to make sure that we keep an eye on the appropriate level of product in the marketplace.

And I think it is something that we demonstrated we have the ability to do, and we will certainly do as we go forward in the future.

So that would be the easiest and most succinct way to answer that first part of the question.

How do you make sure you don't oversell the customers?

Is there a component on that front?

I think that is pretty much something, that is a little bit of what we call the art and the science.

That is the art piece, in making sure that we are gauging the appropriate level of demand in the market, and putting the right amount of product in the marketplace to liquidate.

I think we have over the last six or seven years, I think we have developed a pretty good discipline around that.

Seems to work.

That we continue to stay focused on, and keep an eye on.

That's something we'll continue to stay focused on and keep an eye on.

At the same time, we still believe the U.S.

marketplace is a growth engine for us, and for the most part it is pretty healthy right now.

We have got a little bit of challenge going on in the mall, but overall, all the channels of distribution are still pretty healthy.

I think that sometimes everybody kind of gets a little obsessed with some of the tougher information that is coming out, but overall the entire marketplace is still pretty healthy for us.

We feel good about the U.S.

market.

Okay.

I think the Apparel business, let's go back to specifics around what is performing.

I think that the thing we feel great about right now in apparel is the move forward that we have made around performance apparel, in Nike Pro and the compression part of the business, as well as Nike Sport Essentials .

I think one of the things that we have really started to understand is this idea of franchise-type items that have always been a very successful part of the footwear merchandising line plan, is now becoming a bigger and more important part of the apparel line planning as well.

And Nike Pro and Nike Sport Essentials are two great examples of that type of

Okay.

Is women's doing well?

Yes.

Yes.

Pam says women's is doing well.

Excellent.

Thank you, Pam.

And then I think Olympic advertising, we will start to gear up in the back half a little bit, but with the games, it will be pretty much the summer timeframe when things will really heat up around the world.

And we don't have all of our Olympic plans in place or confirmed just yet.

So I am not prepared to really start to get any more specific than that.

Okay.

Well, thanks and keep up the good work!

Enjoy the summer.

Thanks.

Thanks, bye.

We will go next to Virginia Genereux from Merrill Lynch.

Please go ahead.

Virginia?

We lost Virginia.

Hello?

Okay.

Can we go to the next person, operator?

Okay, just one moment.

Give me just one moment.

Pam?

Yes.

I am still on.

Hi, Margaret.

Hi.

You could talk about gross margin, and how you are going to achieve higher gross margins over the next two to three years, if you care to?

You know we have talked about that one on many previous occasions.

Okay.

Lean manufacturing, SKU productivity, raw material consolidation.

Sales SKU reduction between footwear and apparel.

Yes.

Actually, we are seeing benefits in all those areas.

Lean is a big story, I don't know if you remember, but about a year ago, Lean was about 19% of our footwear.

This past year we jumped up to about 42%, and we see that continuing to grow in '08, and then also being leveraged into apparel.

That is a big one.

Okay, excellent.

Well, I will hang up.

Maybe I am causing the problem.

Actually, what I am going to do is take the opportunity to answer Jeff Edelman's question.

I had a little bit of remedial instruction here from Pam.

As I understand the question, there was about an 8-point spread between constant currency and real dollars in Europe for the fourth quarter revenue, but there is only a 1 point spread for the futures between constant dollars and real dollars.

And the key issue is actually in the base years.

So the fourth quarter of '06, our average euro/dollar conversion rate was about $1.20.

So when we were comparing the fourth quarter of '07, we were at about $1.33 against $1.20.

The first quarter of '07 rate is about $1.27.

So we are comparing against a stronger first quarter euro in the beginning of '07 versus the beginning of '08, than we were in the fourth quarter of '07 versus the fourth quarter of '06.

So hopefully, Jeff, that answers your question.

Pardon the interruption, we are experiencing an interruption in today's conference.

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Hello?

Margaret?

Hello?

Pam, I am hanging up.

We are not sure, we are having technical problems, so we are not sure, we have to hold and wait, so maybe you hang up and redial.

Yes, I think I will.

Okay, bye.

Once again, ladies and gentlemen, we are experiencing an interruption in today's conference.

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Thank you for your patience.

Ladies and gentlemen, we apologize for the interruption in today's conference.

If you could give Pam Catlett a call at 503-671-6453 for the completion of the Q&A session.

We do apologize for any inconvenience we may have caused.

Once again, please call Pam Catlett at 503-671-6453.

Once again, we do apologize for any inconvenience this may have caused.

Thank you, and have a great day.