Nike Inc (NKE) 2017 Q2 法說會逐字稿

Good afternoon, everyone.

Welcome to NIKE Inc.'s FY17 second quarter conference call.

For those who need to reference today's press release, you'll find it at http://investors.

NIKE.com.

Leading today's call is Nitesh Sharan, Vice President, Investor Relations and Treasurer.

Before I turn the call over to Mr. Sharan, please let me remind you that participants on 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 concern 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, changes in the timing of shipments, discounts and returns, which may vary significantly from quarter to quarter.

And in addition, it is important to remember a significant portion of NIKE Inc.'s continuing operations including equipment, Converse, Hurley, and NIKE Golf are not included.

In these future numbers, following the conference call, the futures orders schedule will be posted to the financial schedules on the NIKE Investor Relations website.

Finally, participants may discuss non-GAAP financial measures, including references to wholesale equivalent sales in constant dollar revenue.

References to wholesale equivalent sales are only intended to provide context as to the overall market current footprints of the brands owned by NIKE Inc., and should not be relied upon as a financial measure of actual results.

Similarly, references to constant dollar revenue are intended to provide constants as to the performance of the business [of limiting] foreign exchange fluctuations.

Participants may also make references to other non-public financial and statistical information and non-GAAP financial measures.

Discussion of non-public financial and statistical information and presentations of comparable GAAP measures and quantitative reconciliations could be [find] at NIKE's website, http://investors.

NIKE.com.

Now I'll like to turn the call over to Nitesh Sharan, Vice President, Investor Relations and Treasurer.

Thank you, operator.

Hello, everyone, and thank you for joining us today to discuss NIKE Inc.'s FY17 second quarter results.

As the operator indicated, participants on today's call may discuss non-GAAP financial measures.

You will find the appropriate reconciliations in our press release which was issued about an hour ago, and at our website investors.

NIKE.com.

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

Chairman, President and CEO, Mark Parker, followed by Trevor Edwards, President of the NIKE Brand.

And finally, you will hear from our Chief Financial Officer, Andy Campion, who will give you an in-depth review of our financial results.

Following their prepared remarks, we will take your questions.

We would like to allow as many of you to ask questions as possible in our allotted time, so we would appreciate you limiting your initial questions to two.

In the event you have additional questions that are not covered by others, please feel free to re-queue, and we will do our best to come back to you.

Thanks for your cooperation on this.

I'll now turn the call over to NIKE Inc.

Chairman, President and CEO, Mark Parker.

Thanks, Nitesh, and happy holidays, everyone.

Q2 was another quarter of positive momentum for NIKE Inc.

Let's start with the numbers.

NIKE Inc.'s second quarter revenues were up 6%, growing to $8.2 billion, and on a currency neutral basis, NIKE Inc.

revenues grew 8%.

Gross margin declined approximately 140 basis points to 44.2%.

Earnings per share increased 11% to $0.50, and we delivered ROIC of 31.3%.

In the fast-moving world of sports and youth culture, results like these come from our obsession with the consumer, of knowing what they need, and what inspires them.

That's what drives innovation at NIKE, and innovation is what drives growth.

Our approach has fueled 28 consecutive quarters of growth at a scale that is unrivalled in our industry.

We have a strong track record, and more importantly, we have an even better runway ahead.

With the energy we see in sports right now, along with today's more active lifestyle, it's no surprise that our industry continues to attract competition.

As in sports, competition is a positive thing.

It sharpens our focus, and we know there are areas in the short-term where we haven't executed as precisely as we would have liked.

As good as we are, we can be even better by hyper-focusing on our most compelling growth opportunities.

Starting with the consumer, who's not asking for more product, but looking for more choice of the products they love.

We're responding by giving the consumer more distinctive options with fewer products, what we call Edit to Amplify.

Reducing styles and highlighting key items and concepts has a huge impact across our entire value chain.

And this is especially important in North America and our key geographies, as we better manage supply and demand to drive productivity and profitable top line growth, while highlighting and scaling our most compelling product stories.

Or look at our success in China, where we amplify what's working, and edit out what's not, to accelerate growth.

Beyond product, e-commerce is one example, as we double-down on the power of digital in this mobile-first market.

We also know from our consumers that speed matters.

That insight is driving several speed and agility initiatives throughout our Company.

For example, we're scaling a process we call the Express Lane, which allows us to go from creation to market in weeks instead of months.

The Express Lane is becoming an important competitive advantage, and it led to new product called the LunarCharge this quarter, which is seeing strong consumer demand.

We've always given consumers high energy product in the right place, at the right time.

We're now leveraging and creating capabilities on a much larger scale.

The investments we make in manufacturing revolution and throughout the supply chain are going a long way in helping us realize that.

Editing to amplify, and driving speed and agility are keys to winning now.

They also help set the foundation for growth in the future.

The other focus for us, of course, is innovation, my top priority for the Company.

Innovation is what offers differentiation for consumers, and takes them somewhere new.

It's how we lead the market.

To be clear, without innovation, there is no such thing as sustained growth.

We have some exciting new platforms on the way starting with Air VaporMax, our highest performance and most visually striking Air Max cushioning system ever.

We see a growing anticipation around Air VaporMax from runners to sneaker retailers.

It's a great example of an innovation that stands at the intersection of high-tech, pure function, and aesthetic beauty.

We expect big things from Air VaporMax in running, and we have an ambitious road map to bring it to life through other sports.

In apparel, we launched Therma-Sphere in running, adding to our diverse line-up of apparel that offers warmth without weight in cold weather.

The Sphere family, including its weave style Element Sphere, is performing very well in the marketplace.

We also launched the Strike Series, featuring Aeroswift technology, establishing the new look of football training.

This quarter, we delivered on the promise of personalized performance with our first adaptive product, the HyperAdapt1.0, and there's a reason we called this the 1.0.

Generations 2 and 3 are in the works, expanding adaptive performance products across other sport categories.

There was huge demand for the HyperAdapt1.0, but we plan to drive that momentum into adaptive product at a much larger scale.

And there's a lot more on deck with new cushioning experiences in running and basketball, digitally integrated product, advancements in customization and personalization, and breakthroughs in lightweight performance.

Our pipeline is very strong, covering the near-, medium- and long-term horizons, we've created both platforms and category-defining products, designed in a distinctive style that spans all categories.

We're driving a pace and a scale of innovation that will deliver growth for years to come.

Right now, the consumer continues to respond to new generations of our state-of-the-art platforms in Flyknit, Free and Lunarlon.

This year, we redesigned NIKE Free, and brought a whole new sensation to Lunarlon with the LunarEpic.

Both continue to be huge drivers of our business, in both training and running, for both men and women.

Flyknit is also advancing well beyond our expectations.

Its versatility is allowing us to create unexpected forms across multiple sports for all weather conditions, and even blending it with other materials to advance both performance and style.

And you're about to see even more firepower coming out of basketball.

You'll hear more from Trevor on this, but we're in a good position to build on recent successes in NIKE basketball and Jordan for the back half of the fiscal year.

Another advantage we leverage is NIKE's deep reservoir of iconic styles and innovation.

It's a source of inspiration to our design teams, and a tremendous source of growth for our business.

There's always been a huge consumer appetite for reinterpreted franchises and icons.

Take the Air Force 1, as one example this past quarter.

Of course, the original remains a staple, but this quarter consumers responded some of our long-awaited reissued Air Force 1s, versions like the New York City, the LA, the Chi-Town and the Linen.

But we also give it new life through a weather-repelling sneakerboot, a featherweight Flyknit style, and a NIKELab version with premium materials.

One style that drove tremendous heat in the Air Force 1 family this quarter was the Special Field Air Force 1. Bringing a new look to an icon, this exciting new model has been selling through very quickly.

I think there's a misconception that growth in our lifestyle business comes at the expense of growth in our performance business.

The reality is, they fuel each other.

Performance and lifestyle are not trade-offs.

Consumers want innovation that is styled right, and they want style with real innovation.

They want product that helps them do more and get better, that's comfortable and light, and looks great on the court and on the street.

Ultimately they want choices that look and feel good across the spectrum of performance and lifestyle, including performance products that are in high demand and fueling growth like the LeBron Soldier, the Jordan 31, the Kobe A.D., the Flyknit Racer, the LunarEpic Low, and the upcoming Air VaporMax.

NIKE's opportunity is to continue to deliver across that spectrum to accelerate our leading performance position and the world's largest sportswear business.

Part of our role as the industry leader is to continue to grow the whole market for sport, and that means knowing where the consumer is headed.

We're leading through digital.

We made a move long ago to integrate brand, service, and commerce in a meaningful way for consumers.

No one in our space is close to connecting all three and turning it into value for the business the way that we do.

We brought this to life in a powerful way this quarter with NIKE Soho.

The five story store is built around trial zones, personalized services, and amazing product.

It's bringing digital and physical retail together to deepen our relationships with our customers.

It's clear that DTC continues to be one of the greatest returns on investment.

In Q2, our DTC business grew 23%, with NIKE.com leading the way at 46%.

There continues to be much more growth potential ahead for NIKE in DTC.

We're also accelerating partnerships with our multi-brand wholesalers who share our vision for serving our customers with elevated and differentiated consumer experiences.

Dick's is a great example, with its full service footwear departments.

Other examples this quarter include our women's lifestyle concept shop with Nordstrom, our first European Jordan store in Paris with Foot Locker, and our most digitally integrated multi-brand consumer experience with JD.

More and more consumers want a seamless shopping experience across physical and digital, and we're delivering that completely through our DTC wholesale partners and wholesale.com.

I feel really good about where NIKE stands for the long term.

We're earning our number one position every single day.

We're facing our challenges head on, and we're obsessing the fundamentals, while seizing opportunities to be disruptive in leading our industry.

We are well-positioned for the back half of the year.

And more importantly, we're clear on the opportunities in front of us and confident in our plans to drive long-term growth and shareholder value for years to come.

Thanks, and now here is Trevor.

Thank you, Mark.

Happy holidays, everyone.

The NIKE brand delivered another solid quarter of growth in Q2.

As always, my remarks are on a constant currency basis.

The NIKE brand revenue grew 8%, led by broad-based growth across our largest geographies and categories, and NIKE brand DTC revenue increased 25%, driven by continued strong growth in digital commerce, 11% comp store growth, and new store expansion.

In Q2, we attacked opportunities across our portfolio to strengthen and extend our leadership position.

In particular, I'd like to mention three of note.

First, we're seeing incredible momentum in basketball.

To be clear, basketball is back.

Second, we have made tremendous progress aligning supply and demand in North America, returning this important geography to a pull market.

And third, we continue to see strong and steady momentum in Greater China, as we continued to invest in that market to fuel growth.

Now let's take a look at some of our key categories, starting with running.

Running is our largest performance category, and continues to be a tremendous source of innovation and growth, with Q2 revenue growing at a double-digit rate.

It also continues to be one of our most influential and largest drivers of our sportswear business.

Now, even if the weather turns, our runners never slow down.

They inspire us to provide solutions to help them get out and run more.

Mark mentioned the popular LunarEpic, and in Q2, we launched the LunarEpic Flyknit Shield, with its all-weather construction designed to keep the foot warm and dry.

It's another example of how NIKE expands the market by adapting our popular platforms to new audiences and serve consumer needs.

Other running footwear successes included the Pegasus 33 and the Air Max 2017, which features a fly-mesh upper and a full-length Max Air unit.

In apparel, products offering lightweight, yet breathable warmth are also showing increased popularity with athletes from the most elite to the everyday, highlighted by the Aeroloft and the Sphere platforms.

And I'll be remiss if I did not mention the excitement we're seeing around the Apple Watch NIKE+ as it sells well ahead of our plans.

Lastly, Mark mentioned the Air VaporMax which is not only an amazing style in its own right, but an innovation that will fuel growth across the entire NIKE Air family of products, and I'm really excited about this platform which will be in the market this spring.

Next, basketball.

As the leader in basketball, we never settle.

We know there's always work to be done.

Last year, we knew we didn't perform to our potential in basketball.

Whilst we have a diverse portfolio across NIKE basketball, Jordan and sportswear, we recognize that two of our signature styles were not resonating with consumers to our expectations.

We saw the opportunity, and we addressed it.

First, we went back to the fundamentals and redesigned our products with stronger aesthetics and delivered better priced value to our consumers.

That work led to dynamic products like the Kyrie 2, the LeBron Soldier 10, the KD 9, the Jordan 31, the Kobe A.D. and the Westbrook 0.2.

All of these have been incredibly popular with consumers, on and off the court.

Second, we created demand and energy in the marketplace with our Out of Nowhere campaign.

And third, we delivered all this powerfully through retail, for example, with our House of Hoops partnership with Foot Locker.

The end result, our basketball business is much healthier today than it's ever been over the past 18 months, and the energy continues with the Kyrie 3 and Lebron 14 generating off-the-charts anticipation.

With the upcoming launch of our first new signature shoe in years, the Paul George 1, get ready for even more consumer and commercial energy in NIKE basketball over the next few months.

With all this strong sell-through combined with what's coming, we expect a return to growth in NIKE basketball over the back half of the fiscal year.

At the same time, Jordan footwear continues to electrify the marketplace, with products that generate excitement through vibrant storytelling.

In Q2, this was highlighted by the global launch of the much anticipated Space Jam 11 collection in both performance and lifestyle.

And when combined with other releases this quarter, like the Jordan 1s, the True Blue 3s, and the 9 in the original Colorway, we surprised and delighted sneaker fans across the globe.

This is the power of what we do, the ability to drive energy through a combination of history, culture, and performance.

When we combined many of our hottest styles together, as we have showed with our 12 Soles collection that launched in our Soho store, it brings together performance and sportswear with the power no other brand can match.

And our strong momentum in the next truly global sport is coming at the right time, as we approach the launch of our partnership with the NBA.

In Q2, our sportswear category grew high teens, its 12th consecutive quarter of double-digit growth.

Today we are driving our amplified sports strategy as we go deeper with our best products, mixing innovation and style, creating sneaker heat, from running to basketball to women's to young athletes.

As Mark mentioned, we have shown creativity and versatility in dimensionallizing our footwear franchises across these categories.

We've also shown this ability in the marketplace by connecting these products to consumers with a two-fold approach.

We create energy through targeted releases, while also giving consumers easy access through broader launches across the marketplace.

Throughout this work, we're seeing strong sell-through for silhouettes that mix our past with a modern simplicity, like the Presto Mid Utility, the Flyknit Racer, and the new style, the LunarCharge which we brought to market in roughly a quarter of the time it usually takes, thanks to our accelerated footwear creation capacity.

That's the power of our Express Lane process.

We also had the successful launch of our Beautiful [Power] collection for her, which featured great styles like the Cortez Classic and the Air Max Thea Ultra in all black premium leather.

At the same time, we drove traffic into our dedicated women's spaces with two exclusive city styles for the Air Max 90.

All this work, and so much more, goes to consistent efforts to serve in women who covered sneaker style.

But before I move on from sportswear, I want to make one very important point.

We continue to see extraordinary growth in our sportswear apparel business, across men's and women's, up and down the price points, and fueled by our fleece collections.

This marketplace energy comes from the power and creativity we're using to expand what sport means to the lifestyle of today's consumer.

Now, let's take a look at a few of our key geographies.

In Q2, North America revenue was up 3%.

From the Cavs to the Cubs, sports in North America have never been more inspiring, and the energy is set to continue with the upcoming playoffs in college football, and the NFL filled entirely with teams wearing NIKE.

As we continue to serve these athletes, and celebrate these heroes and story lines, it's no surprise our brand is so strong.

From a marketplace perspective, we're seeing continued improvement with inventory down 4%.

We continue to keep supply tight, which you'll see reflected in futures.

And as a result, we expect a stronger sell-through to the end consumer which ultimately results in stronger revenue growth.

Andy will talk more about this in our guidance, but this is another area where we identified the challenge, we attacked it, and now we're starting to see the returns.

Q2 growth in North America was led by DTC, where we experienced a strong start to the holiday season over the Black Friday weekend.

Compared to last year, we saw double-digit traffic increases and higher conversion and higher dollars per transaction across our stores and NIKE.com.

And our new Soho store in New York is not only a source of growth in this important market, it's a powerful look at the future of sports retail, product trials with experts, elevated personalized experiences, and heightened member engagement, all while seamlessly combining digital and physical.

We create environments that bring our products and services together in a way that allows consumers to experience the NIKE brand in its most sublime state, and we are executing this strategy through our DTC businesses as well as with our key strategic wholesale partners who share this vision.

We still see tremendous potential in North America, and with the strategies in place, we will grow both NIKE and the overall marketplace.

Now let's turn to Western Europe, where we saw our 13th consecutive quarter of double-digit revenue growth, with strong growth across nearly all categories led by sportswear and running.

Mark mentioned our first European Jordan store in Paris.

Just as in Soho, we see the Jordan Bastille store as the future of retail, featuring premium products and services like customization and interactive wear testing.

And as always, our footprint in football continues to expand across Europe, with our recent resigning of the French, English and Turkish Federations, as well as the recent Golden Ball winner, Cristiano Ronaldo.

And with the start of our new relationship with Chelsea Football Club next season, our brand in Europe is only getting stronger.

Lastly, Greater China continued its strong results with its 10th consecutive quarter of double-digit growth, highlighted by another quarter of triple-digit growth in NIKE.com.

We had our biggest single day ever, reaching nearly 3 times last year's sales.

Our success followed our decisions to feature exclusive products on NIKE.com and at NIKE-only stores, and gave early access to high-heat products for our NIKE+ members, and we also saw tremendous results with Tmall.

The Greater China marketplace continues to be fueled by higher sports participation, with 38,000 runners taking part in the Shanghai Marathon, while nearly 4 times that many consumers tried to sign up.

Runners were introduced to NIKE's premium services by customizing the NIKE Pro Bras, and creating custom shoes at NIKEiD stations just to name a few.

In fact, I was in China a few weeks ago, and I met one athlete who achieved a personal dream to run the Shanghai marathon.

What struck me wasn't just her desire to reach her potential, but the importance of NIKE's role in meeting her complete lifestyle needs, to look good, to feel confident, and to connect with others throughout her journey.

I left China reminded of the amazing potential for our brand, as we move at her speed, and we authentically serve athletes like her.

All in all, we are still in early days of our [mark] into growth in this important geography.

In the end, we have the strategies in place that yield results.

Consumers have so many choices, more than ever, which is why we are glad that we have the foundation in place to connect consumers with energy and excitement.

We know what works, and we know how to create, amplify, and sustain our opportunities.

Make no mistake, in 2017, we will stay on offense.

This mentality is one of our greatest competitive advantages, that relentless drive to serve our athlete and consumers is what keeps us in the lead.

Thanks.

Now here's Andy.

Thanks, Mark and Trevor, and happy holidays to everyone on the call.

The enduring passion for sport around the world and consumer's desire to lead a more active lifestyle continue to fuel new opportunities for growth in our industry, and the growth potential in our industry has always attracted competition.

That said, as Mark noted, Q2 was NIKE's 28th consecutive quarter of growth.

Each and every quarter over the past seven years, NIKE has grown, despite healthy competition within our industry, extreme macroeconomic volatility, discontinuity in the retail landscape, and rapidly evolving trends in consumer preferences.

That track record does not happen by accident.

As the leading brand in sport, we are on the offense always.

We take nothing for granted.

We continuously evaluate how we can better leverage our unrivalled portfolio of businesses and competitive advantages to grow the market and win.

From a brand and business perspective, we are obsessed with staying one step ahead of consumer expectations, and maintaining that focus and pace is what ultimately separates NIKE from the competition over the long haul.

From a financial perspective, we are obsessed with delivering one, strong growth, two, expanding profitability, and three, high returns on invested capital.

We continue to manage all of the operating levers in our business to deliver across all three dimensions of our financial model, and that has afforded NIKE unmatched scale and resources.

Like the world's best marathoners, the results that we post always reflect moments where we have pushed the pace, and moments where we took stock of the circumstances and made adjustments.

In the second quarter, we executed on the plan that we shared with you 90 days ago.

We pushed the pace with innovation, because as Mark noted, there is no such thing as sustained growth without innovation.

We also made important adjustments.

For example, with respect to supply and demand management, to ensure the sustainability, profitability, and capital efficiency of our growth long term.

From a product innovation perspective, we launched several innovative and beautifully designed footwear and apparel styles across both our performance categories and sportswear.

Perhaps most notably, we launched the HyperAdapt 1.0 which is an innovative product in its own right, and also a glimpse into the future of personalized performance.

As we look ahead to the second half of FY17, we will continue pushing the pace with products such as the Air VaporMax that merge innovation and style.

In Q2, we also innovated at retail.

As we've said in the past, NIKE's growth trajectory is not highly correlated with macroeconomic trends, nor is our growth solely a function of market share.

Our primary focus has always been on growing the overall market, creating greater capacity for the NIKE brand over the long term.

Today we see the potential to increasingly leverage digital to more personally and fully serve consumers, unlocking new growth and productivity within and well beyond the four walls of a retail store.

As Trevor mentioned in November, we opened NIKE Soho in New York, which sheds light on our vision for the future of retail.

Finally, we continue to innovate within our supply chain.

Our investments in manufacturing revolution, our partnerships with FLEX and Apollo, and the speed and agility initiatives that Mark referenced all enable us to bring product creation closer to the consumer, while also enhancing labor productivity and reducing materials waste.

As the world becomes increasingly dynamic, we could not be more pleased with the headstart that we have, in terms of supply chain innovation.

While we pushed the pace with innovation in Q2, we also made important adjustments in areas where we knew we could do better.

Trevor referred to the work we've done to reignite strong momentum in NIKE basketball.

We also took the actions required to return North America to a pull market.

We have grown our business in North America for seven consecutive years.

No other brand has near our scale, or our proven ability to expand the market in this important geography.

That said, we are relentlessly self-critical at NIKE.

Several factors led to elevated inventory in North America, including the West Coast port congestion, issues in our North America distribution center, third-party retail discontinuities, and lower than expected sell-through on a few key items last year, most notably two signature styles in basketball.

The actions we have taken to rebalance our supply negatively impacted our gross margin over the past two quarters, but at NIKE, we manage for the long term.

Based on the progress we have made, we now expect North America to continue growing in the second half of the fiscal year, with a return to expanding gross margins and tighter inventor levels.

With that context, let's turn to a more detailed review of our Q2 financial results and our outlook going forward.

In Q2, NIKE Inc.

revenue increased over 6%.

On a currency neutral basis, revenue grew 8%, led by double-digit growth in Western Europe, Greater China, and the emerging markets.

Second quarter diluted EPS of $0.50 increased 11% versus the prior year, driven by revenue growth, SG&A leverage, and a lower average share count.

Gross margin contracted approximately 140 basis points in the quarter, roughly in line with our expectations.

Full price average selling prices continued to expand.

However, margin contracted overall due to higher product costs, FX headwinds, and a higher mix of off-price versus the prior year, and the more discrete or temporary items that we referenced last quarter.

Demand creation decreased 1% for the quarter according to plan, following significant Q1 investments in the Olympics and Euro Champs.

Operating overhead decreased 3%, as our continued strategic investments are being funded by a productivity gains as we increasingly edit to amplify within our core operations.

The effective tax rate for Q2 was 24.4%, compared to 19.1% for the same period last year, primarily due to an increased mix of US earnings which are generally subject to a higher tax rate.

As of November 30, inventories were up 9%.

Wholesale units grew just 1%.

The remainder of the expansion in inventory was driven by a higher average cost due primarily to product mix, as well as growth in support of our fast-growing DTC businesses.

Now, let's turn to the performance of a few key operating segments.

North America revenue grew 3% on both a reported and constant currency basis to $3.7 billion, with balanced growth across footwear and apparel.

Growth was led by DTC, which grew 17% with 10% comp store growth.

EBIT for North America increased 3% in the quarter as revenue growth, full price gross margin expansion, and SG&A leverage all contributed to increased profitability.

These factors were partially offset by a higher mix of off-price versus the same period in the prior year.

In the second half of FY17, you will see evidence of the progress that we have made returning North America to a pull market.

North America revenue growth will continue to outpace futures, and that will be coupled with a return to gross margin expansion.

In Western Europe, revenue increased 12% on a currency neutral basis, as we continue to see strong multi-dimensional growth across the business, from footwear to apparel, performance categories to sportswear, wholesale to DTC, and across all territories.

Standout categories for the quarter were sportswear, running, and Jordan.

On a reported basis, revenue increased 7%, while EBIT declined 23% reflecting impact of transactional FX headwinds on gross margin, partially offset by SG&A leverage.

Our emerging markets geography grew 13% on a currency neutral basis, driven by double-digit growth across sportswear, running, and Jordan and across the territories of SoCo, Korea and Mexico.

On a reported basis, revenue and EBIT continued to be heavily impacted by FX headwinds.

As a result, reported revenue increased 6%, while EBIT decreased 2%.

Finally, Greater China continues to deliver exceptional results.

Currency neutral revenue grew 17% in the quarter, reflecting strong growth across nearly all dimensions of our business.

Most categories grew double-digits, and our DTC businesses delivered another quarter of tremendous growth, up 42%.

NIKE is the leading brand in China, with the deepest, most authentic connections to the Chinese consumer.

We expect strong and steady growth going forward in China, as we serve consumers through China's fast-growing digital ecosystem and our continued expansion of category-oriented NIKE branded concepts at retail.

On a reported basis, revenue grew 12% and EBIT expanded 15% due to strong revenue growth and SG&A leverage.

Over the balance of the fiscal year, we will continue to manage for the long term, with our focus on ensuring sustainable, profitable, capital efficient growth.

As for specific guidance, for the full year, we continue to expect reported revenue growth in the high single-digit range.

That said, FX headwinds from further strengthening of the US dollar have put downward pressure on our second half revenue forecast.

While our hedges will delay and partially mitigate the impact of FX on our profitability, we do not hedge the revenue line item per se.

On a currency neutral basis, we continue to expect revenue growth for the full year to be within the high single to low double-digit range.

For Q3, we expect reported revenue to grow squarely in the mid single-digit range.

As we shared on our last earnings conference call, we are changing the sequencing of our communications regarding NIKE brand futures orders.

Futures orders will now be posted on our Investor Relations website following this call, in the same detail as previously reported in our earnings release.

As you will see, currency neutral futures orders are growing 2%, driven by a 1% increase in units, with increases in average selling prices contributing the other 1 percentage point of growth.

Futures orders are flat versus prior year on a reported basis.

As you know, futures orders growth and reported revenue growth have become increasingly less correlated.

That lesser correlation is evidenced by the roughly 5 percentage point disparity between our guidance for Q3 reported revenue growth and our futures growth on a reported basis.

The longer-term more systemic drivers of the disparity include, first, impacts related to our evolving DTC versus wholesale business mix.

For example, DTC futures are reported on a wholesale equivalent basis.

However, reported revenue for DTC is recognized based upon the full retail price to consumers.

Therefore, as the mix of futures shifts toward DTC, NIKE's overall reported revenue will inherently grow faster than futures.

Second, material dimensions of our revenue are not included within futures orders such as Converse, NIKE factory stores, and our shorter lead time or at-once businesses.

There can also be temporary anomalies between futures orders and reported revenue growth.

One of the most notable is consumer sell-through.

Take for example, North America, whereas you will see futures orders are down 4%, but we expect continued revenue growth and expanding margins over the second half of this fiscal year.

In the second half of FY16, we had elevated inventory levels for the reasons we've detailed.

In the second half of FY17, we now have tighter supply against continuing strong demand, and that will have a favorable impact on revenue growth as a result of lower year-over-year cancellations, returns and discounts.

Other temporary anomalies can include the timing of our buys related to launches, key sports moments, and other events.

In short, the key takeaway is that our revenue guidance reflects a much more comprehensive outlook for our business as compared to using reported futures orders growth as a proxy.

Turning to gross margin.

For the second half of the fiscal year, we expect less contraction than we experienced in the first half, as we see stronger full price sell-through to consumers.

For Q3, we expect gross margin to contract by approximately 100 to 125 basis points, driven primarily by FX.

The fundamental drivers of NIKE's long-term gross margin expansion remain intact, including higher average selling prices, product cost optimization through our manufacturing revolution efforts, and the positive mix benefit associated with our fast-growing DTC businesses.

For total SG&A, we now expect full year growth in the low single to mid single-digit range as we edit to amplify.

We expect Q3 SG&A to grow in the mid single to high single-digits.

We expect other income net of interest expense to be approximately $80 million for the full year, and approximately zero in Q3.

We continue to expect our effective tax rate will be approximately 17% for the full year.

For Q3, we expect the rate to be approximately 18% to 20%.

As evidenced by our Q2 results and our outlook for the balance of the year, we continue to be on the offense, focused on driving sustainable, profitable, capital efficient growth over the long term.

With that, we'll now open the call up for your questions.

(Operator Instructions)

Your first question comes from Bob Drbul from Guggenheim Securities.

Hi, good afternoon.

Hi, Bob.

The first question that I have is, on the commentary around basketball, how does that fit into the revenue outlook for the back half of the year?

Is that more the basketball business turning in the fourth fiscal quarter?

Like where are you seeing the turn in basketball, Trevor?

Can you talk a little bit more about that?

Yes, absolutely.

One of the things we get a chance to see is, we get a chance to see basketball in line, and what we are seeing is basketball is back.

The consumer response to the latest signature styles has been incredibly strong, and we're seeing some more energy moments to come.

What we have -- what we've definitely seen in North America is we've seen a healthy sell-throughs on the Kyrie 2s, the LeBron Soldiers, the KD 9s, the Kobe ADs, the Jordan 31s.

So we're seeing a really comprehensive shift towards, energy coming towards basketball, both in the numbers, but also in your on the street, on the ground, you're seeing it both on the court and off the court.

One of the things I would like to do with basketball is maybe broaden the context, so that we're also thinking about our sportswear business, which is a part of basketball.

And in sportswear, the Air Force 1 styles continue to actually perform very well.

The Special Forces Air Force 1 was exceptionally strong.

The Foamposite was also good, and Jordan both on its performance, the Jordan 31 and the retro style did really well.

So all of those really put us in a position where we feel that we are poised to get ready for the NBA partnership as we go into the next year.

So all of the energy signs are there for us, and so we see the back half continuing to accelerate in our basketball business.

Got it.

And then I just have a follow-up question on, so when you look at the inventory levels, specifically in North America, and you look at the gross margin guidance, at retail today, there's a lot of the 25% off throughout many of the, like the mid tier players.

So can you just help us reconcile where you are with the clean inventory position that you talk about, North America being down 4%, and how -- what's happening at retail, this month for instance, is altering your outlook at all, if any?

Yes, Bob.

This is Andy.

I'll start.

Happy holidays, by the way.

You too.

As you noted, our inventory in North America is down.

And as we talked about on the call, we feel like we've made a tremendous amount of progress in tightening supply and demand, and positioning ourself for a more sustainable profitable growth in the second half.

Just to give you some dimension on that, we have had a very strong sell-through in inline.

We had a great holiday season.

We continue to see tremendous growth in NIKE.com, for example.

And I'll remind you that we also have our factory store business, and that has been a great channel or outlet for us to take the actions that were required to rebalance supply and demand, and we've seen phenomenal traffic, and conversion, and comp store growth in that dimension of the business.

So feel great from that perspective.

And then I'll hand it over to Trevor, but as Trevor noted, we are seeing tremendous opportunities for growth in some of the biggest and most important categories in North America, that being sportswear, which continues to deliver strong growth, both footwear and apparel.

We feel like we have really reignited strong momentum in basketball.

And as Trevor said, that's with -- we're fast approaching the launch of the NBA partnership.

So again, tighter inventories, continued growth, and a return to gross margin expansion in North America is what we see.

Yes.

I think just to touch on what Andy just hit on, I would say, that there is -- [they do have] more promotional activity in the marketplace.

Having said that, when we tighten supply and demand, we're seeing increasingly stronger full price sales, so we feel good about that.

In North America again, we are seeing our sell-throughs perform at a much better level.

The other thing that you will see coming into the spring season, you're going to see a lot of excitement, some of the great products we have on tap.

So we are very excited and bullish about, as we launch the Air VaporMax, not only for the VaporMax itself, but also because it will drive a greater Air business across our business.

So we think as we bring more innovation into the marketplace, that allows us to obviously command stronger full price in our products.

And with that I mean, we like I said, we're definitely seeing all of the signs that say that the actual decline in inventory is now proven the stronger sell-through.

We're seeing stronger sell-through as a result.

Thanks, Bob.

We'll take the next question, please.

Your next question comes from the line of Jim Duffy from Stifel.

Thank you, happy holidays, everyone.

I have a couple questions.

The first around your efforts to drive speed and agility.

Can you speak in more detail around the Express Lane agenda, and maybe use LunarCharge as an example?

Yes, let me touch on that.

We've always had the ability to move quickly and respond.

What we're doing now through Express Lane, particularly as we scale this capability across the org, is to make this a sustained season in, season out, part of what we do and how we operate.

The exciting thing about the Express Lane is it literally puts us in a position to, as I mentioned, deliver product from start to finish, completely new product in weeks versus months.

The LunarCharge is a great example.

In this last quarter of the product, it literally through that complete start from scratch to a completed product, went out to the market, and the sell-throughs on that have been incredibly positive.

So we're now in the midst, as we move into the second half of the year and then beyond frankly, this is the new norm, is to make this a part of the muscle that we have to give us a more, a complete competitive advantage.

We're focused right now in footwear, but we see this scaling also across apparel as well.

I'm personally, as the product nerd, incredibly excited, not just by the ability to do this, but to take it to a significantly higher scale.

Great.

Thank you.

My next question around Greater China and your efforts in category-oriented retail.

Could you talk a little bit about where you stand there, and how much runway there is left to drive that agenda?

Yes, obviously, I was just in China actually a couple weeks ago, and the thing that I continue to see is the NIKE brand is really performing incredibly well.

And I love to give a context, which is both when you go in the stores and you walk the streets, you can certainly see the energy and vibrancy for the brand.

And you can see that also in the strong sell-through that we're seeing in the marketplace.

Across singles day, singles day, we actually were 3 times, it was 300% greater this year than last, in terms of sales.

And so, we're seeing tremendous growth in the dot-com business.

The categories that are performing well are sportswear, running, Jordan brand and NIKE basketball, all performing really well, which were the key ones we decided to focus in on in China.

We also continue to have really a tremendous amount of doors in the marketplace, over 6,000 doors.

So we're really ever-present in the market, which allows us to expand and tell the right stories, and create the right impact.

And one of the bigger sort of tail winds that we always have is sports participation.

And as I mentioned in the prepared remarks, certainly the Shanghai Marathon is one example of watching this market become increasingly sophisticated around participation, around their connection to sports, and also their connection into sport culture.

And so, we are seeing it across multiple dimensions.

So I continue to feel very bullish about China, as we do as a total group.

And again, 10 consecutive quarters of continuous growth.

Thanks, Jim.

Operator, we'll take the next question, please.

Your next question comes from Omar Saad from Evercore ISI.

Thank you, good afternoon.

I wanted to actually ask my first question about, maybe some of your insights to help us think about the potentially evolving tax environment with the new administration.

There's been a lot of speculation, hypothesizing around potential imported, [order] adjusted tax, and taxes on imported goods, foreign sourced goods.

How do we think about potential puts and takes, longer term, as we try to incorporate into our longer term model how these tax changes could affect NIKE's P&L?

Well, Omar, you're absolutely correct.

There's lots of speculation here.

I believe it's really too early to determine what specific changes may be proposed, but we are looking forward to working with the new administration and Congress regarding those potential reforms.

I want to quickly add that NIKE continues to believe in free and fair trade.

We are a global Company, obviously operating in over 190 countries, serving billions of consumers with close to 70,000 employees.

So the reality for us is, the closer we can be to the consumers that we serve, in markets around the world, the more efficiently we can do so.

And the more efficiently we can do so, I think the better for NIKE.

So as far as specifics around trade and tax policy, again, I think that it's too early to speculate, but we look forward to engaging and being a part of that process.

And Mark, maybe as a follow-up along those lines, how do we think about manufacturing revolution?

You've got a lot of things in the pipeline, in terms of bringing some production back to North America.

Does it -- there's any sort of change at least hypothetically in terms of the tax law perhaps accelerate the opportunity to build up more domestic manufacturing?

And maybe how should we think about the scale and longer term timing around that process?

Thanks.

Well, just -- thanks, Omar.

Just broadly, Andy touched on this in a little more depth, but we're incredibly excited about the ManRev initiative that we have.

It's a long-term commitment.

We've made a lot of progress, it's having real impact for NIKE.

The, again, speculation on tax incentives is a bit early.

I will say that we're highly motivated, as I said, to engage and look for opportunities to bring our product capabilities closer to markets.

We've talked about that publicly, and that continues to be the case.

So we're looking for expanding on those opportunities as much as we possibly can, and working with the administration in that respect.

We're making, though, real headway on our ManRev initiative, certainly with FLEX, and we talked about Apollo.

We've got new methods of manufacturing that we're really focused on here through our advanced product creation center.

Some of the most exciting innovation we have beyond product is in this space.

And the good news is that not only enables us to get closer to the market with more customized and personalized product potentially, but it also helps to just create a better business overall.

So the financial impact is definitely there, and it creates new opportunities from a design standpoint.

So incredibly bullish on manufacturing revolution, ManRev as we call it.

And I hope, and we'll engage proactively to make sure that -- to we see what we can do anyway, to make sure that that continues to be the case.

Yes, Omar, I'd just say, really on two fronts, as Mark said, we are committed to, and advocating for free and fair trade, and we'll continue to advocate for policies both trade and tax, that allow us to innovate, best serve consumers, expand our business and drive growth.

At the same time, as you know over the past several years, we very proactively and strategically been evolving our operating model through investments in manufacturing revolution and other supply chain initiatives.

With the goal not only being to yield benefits in terms of labor productivity and lower materials costs, but as we've said, the opportunity to be much closer to marketing, closer to the consumer.

Thanks, Omar.

Operator, we have time for one more question.

The next question comes from Jonathan Komp with Robert W. Baird.

Yes, hi.

Thanks.

First, could I just ask a follow-up on the futures growth, and this is globally, but also more specifically for North America?

Any comments or perspective on how much your actions to better control the inventory in the channel may be weighing on the total futures growth?

Yes, I think when you think about how we manage supply and demand, it's across several dimensions.

One of those is managing sell-through in the marketplace on a weekly and monthly basis.

We also, when we're in a situation like we were in North America, do look longer term, so futures are typically six months out.

We do look at the forward-looking futures window that we're in at any given time and manage that order book, in the context of what we see in the market as of that point and what we expect over the several months leading up to that point.

So they're related.

They're not perfectly correlated or the only lever.

But we absolutely are continually looking at the orders that we're taking for two seasons out in the context of the trends in the marketplace.

Okay, got it.

And then maybe switching gears, just a question on the SG&A line.

It looked very well-managed in the quarter, better than maybe you had anticipated coming in, and the full year was revised lower by a little bit.

Any perspective on some of the efforts and maybe some of the successes you've had on editing down the SG&A spend and maybe the sustainability of some of what we've seen?

Absolutely.

As you know, and as Mark noted, and I noted, we've grown for seven consecutive years, 28 consecutive quarters of growth.

And over that period, and well before that, we've always focused first on investing strategically and with a view toward the long-term.

What we see today is the ability to continue to do that, but reflect on our core level of investment and spending, and frankly, operational infrastructure, and take advantage of productivity gains we see.

That wasn't a quarterly phenomenon, as you know.

And I'm sure you've been paying close attention over the last several quarters, it's something that we've seen as a sustained opportunity.

I think it really ties back to a phrase that Mark, Trevor, and I all love, editing to amplify.

And that has now become more systemically, how we think about our investments across SG&A.

And what it also evidence is, is the strategic alignment across our management team.

I think it's evidence of our management team's ability to prioritize what's most important to fuel growth, and get leverage in other areas where we think we've got ample resources.

Thank you, John.

Well, since it's the holiday season, we're going try to squeeze in one more.

The next question comes from Sam Poser with Susquehanna.

Good evening.

Thank you for taking my question.

Well, the one thing I wanted to understand is, can you give us some idea of what percentage the direct-to-consumer business was of your total revenue in the quarter, and how that compared to last year, and how you're thinking about that on a forward basis?

Yes, Sam.

This is Andy.

I -- we don't report percentage of business per se.

And as you know, DTC is on a reported basis, includes full retail sales, and wholesale is at wholesale prices.

So to some extent, that would -- just on a revenue basis, that would be comparing apples and oranges.

But as you know, again, someone who has followed us for a long time, the rate of growth in our DTC businesses have significantly outpaced the rate of growth, still growth in our wholesale business.

And so, that was also the case in the second quarter.

As you review our 10-Q filing, you'll see some detail on that, the difference between our DTC business and our sales to third-party wholesalers.

At the same time, I think it's really important to note that, what's most important to us is growing the overall market, as we said.

And that has less to do with owned versus partnered, and more to do with the nature of the experiences that we're putting into the marketplace.

Soho is a great example.

It happens to be owned, but the focus is really much more personalized service to the consumer and creating what we're really calling new square foot, leveraging digital to more fully serve consumer and expand the productivity.

And we're going to increasingly do that with our wholesale partners as well.

We have several very strategic wholesale partners here in North America, Western Europe, and around the world.

We have wholesale partners in China who operate NIKE branded stores for us.

And we think that's a big opportunity, both owned and partnered going forward to expand the market.

Just a quick follow-up.

I asked the question really, as it related to the futures numbers, and how to think about what percentage of the business really isn't reflected in those futures numbers, the way so -- just the way people think of it?

Because clearly, your decision to change the way you report it, is also a change in how meaningfully it is to you.

And that's really where I was going with that question.

Yes, why don't I -- I'll give you a bit of dimension on that Sam, very briefly.

NIKE.com futures orders and our inline store, so our full price stores, futures orders are included in futures.

Our NIKE factory store business, which is a very sizeable business, in fact it's a bigger business than our inline brick-and-mortar business, that factory store business is not included in futures.

Obviously, there are various rates of growth across those dimensions, with the highest rate of growth being in NIKE.com.

And I'd just note the last thing on NIKE.com, as we continue to see extraordinary growth in NIKE.com, we're also expanding internationally, and that can create some anomalies year-over-year, in terms of stocking up inventory for expansion and whatnot.

Thank you very much.

Have a great holiday.

You too.

Happy holidays, everyone.

Thanks for joining today, and we look forward to speaking to you next quarter.

Bye.

This concludes today's conference call.

You may now disconnect.