NIKE, Inc.
Q4 2011 Earnings Call Transcript

Published: 30 Jun 2011

[Kelley Hall:]

Good morning, everybody. Welcome. Thanks for being here today. We'll go ahead and get started. For those of you I haven't met yet, I'm Kelley Hall, Senior Director of Investor Relations for NIKE Inc. We have a pretty full agenda planned for you today. You have copies at your desk so you can see who you're going to hear from and the topics we're going to cover. And while we have a lot of information to share with you, we have 3 main goals for the day. The first is to highlight our FY '11 results and share progress against the FY '15 growth goals that we outlined last May. Second, to provide insight on how we'll leverage the power of our portfolio, fueled by our innovation agenda to capture the significant growth opportunities we see over the next 4 years. And third, to show you the strength of our management team. Their exceptional talent and leadership will drive the NIKE Inc. growth strategy. Of course, we intend to do this within the rules as expressed on the slide behind me. Halfway through the day, we'll take a break for lunch. Speakers will not join you over lunch, as we'll be at the midway point, but they will look forward to answering your questions at the Q&A following the presentations, as well as having a chance to chat with you at the reception that follows. So with that, I'll ask you to please silence your phones and we'll get started. Thank you and enjoy the day. [Video Presentation]

[Mark Parker:]

Okay, good morning, everybody. And thanks for being here. Welcome to the Nike world headquarters. You saw a bit of then and now in that video, and then you saw that also in the lobby when you walked in this morning. And that display that you saw is part of our annual maxims awards which happens this Thursday. And that's really a celebration of the amazing work that our team put out throughout the year. And what you saw are the finalists amongst hundreds of nominated projects from all over the world. And I think it's clear that we are prolific and that we are proud of the innovations we bring to athletes and consumers all over the world. And it's that same innovation that creates value for our shareholders and for all of you here today. And I think we've done a pretty good job at that. In the last 10 years, we more than doubled our revenue. We increased our gross margins more than 5 points and compounded earnings per share grew at 15%. We nearly tripled our cash flow from operations. We paid out over $3 billion in dividends, and we repurchased $7 billion of stock. And our market cap more than tripled, driving a 17% average annual return to shareholders. I think that's what makes Nike a growth company. Today, we have 7 distinct high-energy brands, each with a powerful connection to its consumers. And it's really those connections that give us the insights that we need to create the amazing products and experiences and then we do that over and over again and that's really the fundamental cycle that continually drives growth. And while each brand has an enormous potential in its own right, the real power of NIKE Inc. comes from making the overall value of the portfolio greater than the sum of the parts. And again, I want to remind you that we have a broad definition of that word portfolio. It's our NIKE brands and everything that drives them. It's our product, our retail partners and execution, our supply chain, our strong balance sheet and then our very focused and talented management team. And we use the power of the portfolio to manage risk and then to attack our biggest growth opportunities. It's the source of our financial and human capital. It gives us the scale necessary to drive down cost and it enables us to leverage our resources across multiple brands and categories. And it all revolves around one thing, something very near and dear to my heart, and that's innovation. And that's what we do. That's what we believe in. And it comes to life in 3 very important and powerful ways. We innovate obviously to serve the athlete. We innovate to grow the company, and then we also innovate to inspire the world. So I'll break that down just a little bit for you. Innovate to serve the athlete, first and foremost. Deliver amazing products and experiences. That's easy in theory, but tougher in execution. When we launched Nike Free technology, it changed the look, the feel and the role that footwear plays in the life of the athlete. Today, Nike Free is one of our most successful innovation stories. When we launched Lunar technology, we knew it would change the industry. But what we didn't know is that it would be $1.5 billion in business just 3 years later. If you look at running, just this one category, last year alone, we held 132 runs in 28 different countries. We increased membership to Nike+ by 40%. We launched what is arguably the hottest digital product in the industry with the GPS sport watch and then we increased revenue by 30%. And that's all since we met last May in New York. Then Nike Pro. Nike Pro is now the leading women's based player brand in the United States. And on the men's side, we closed the gap to 10 points in April and then last month, we cut that gap in half again to 5. So we have lots of great momentum with Nike Pro. There is amazing energy in sports today, the World Cup, the Nike U.S. Open of Surfing, the World Basketball Festival in New York, the Champions League, I can go on and on. But there's millions of athletes using Nike digital apps, billions of consumers watching our athletes all around the world. And as I said, the appetite for sports is strong and growing and Nike is really leading the way. We consistently create and commercialize innovative products and experiences and that's what really extends our leadership position. In fact, NIKE Inc. holds more than twice the number of invention patents than our top 5 competitors combined and I really believe we're just getting warmed up. The opportunities to deliver meaningful product innovation have really never been greater, and we've never been more excited and better prepared to take advantage of those opportunities. And I've been with Nike for over 32 years and I've never seen as much potential as I do today for really meaningful innovation. Innovate to grow the company, obviously very important and there's 2 huge opportunities here the way we look at it. We call the first, transforming the marketplace. And we're on the ground around the world identifying the markets, connecting with consumers and assessing retail opportunities. And then we use this knowledge to apply our resources where they make the most difference. And they make the most difference with our wholesale partners. Since we met in New York last year, we opened more than 100 premium category destinations with our wholesale partners. And we opened 9 brand and category experiences in the U.S. and Europe. Converse opened a couple, one in New York and one in Boston. And NIKE Inc. e-commerce is up 25% on a currency neutral basis, with nikestore.com leading the way, up 32%. Those are big increases. But I'll be the first to tell you that they pale in comparison to the opportunity we have to expand e-commerce across all NIKE Inc. brands. The second opportunity here is transforming our operational capability. We're continually refining our operations. That's how we create product, how that product gets manufactured, how we get it into the hands of our retailers and then also obviously our consumers. And we had some capacity and delivery challenges over the past year as you know, and that points to a couple of things. One is the tremendous demand for the product, but two also the need to be quicker about delivery. And that's exactly what we're doing. We just opened a new China logistics center, and at 120,000 square meters, it's one of the largest DCs in all of Asia. And it's on track by the way to become the first in China to be lead certified. The CLC, as we call it, will give us a huge advantage in how we handle all NIKE Inc. products in China, so a big investment but a big payoff. We're able to make these investments in the future because of the strength of our balance sheet and the confidence we have in our strategies. Finally, we innovate to inspire the world. And I think one of the great lessons of the 21st century is the need for collaboration. Honestly, something we in our early days were not as good at, but we're getting actually quite good at it. I believe that nobody can solve the big challenges or reach the bigger opportunities of the future alone, not the government, not companies, not activists. I think we really all have to work together to make that happen. And this is especially true -- especially true in something like sustainability. Last year, we reclaimed 13 million plastic bottles from landfills in Japan and Taiwan and then turned those bottles into our lightest high-performance football jerseys ever. And then we put those football jerseys on 9 football -- national football teams at the World Cup last summer. And that changed product creation in football forever. I believe that any company doing business today has 2 simple options. One is embrace sustainability as a core part of your growth strategy or eventually stop growing. We're working with our partners also to create new ways for young people everywhere to access sports. This is a big initiative for Nike. And this makes our youth healthier and overall it makes the future brighter for everybody here. And we continue to have breakthroughs with our girl effect. You may have heard about this. This is the sole focus of our Nike Foundation, focus on adolescent girls in developing parts of the world. Earlier this year, I went to Kenya, Ethiopia and Uganda and I saw firsthand the overwhelming impact of intergenerational poverty. But then I also saw the very real sense of hope and possibility in young girls who are breaking that cycle who are given opportunities. And this is all part of Nike's commitment to build a better world while we build a better company, and I'm very proud of the progress we’re making here. So back to 2011. This is a very ambitious year. We told you last May that we would double our innovation agenda and drive growth at the category, the brand and the country level and that's exactly what we did. NIKE Inc. revenue was up 10% to a record $20.9 billion. NIKE Brand revenue was up 10% to a record $18.1 billion. Our other businesses grew 9% to $2.7 billion. And NIKE Brand futures were up 15%. And diluted earnings per share grew 14% coming in at $4.39 which is also a new record. The last 12 months, I think, revealed many changes in the world to all of us. The global economy continues to recover. But as we've seen, that's been a slow and volatile recovery, particularly in certain parts of the world. Consumers, particularly youth face that nagging unemployment. Governments are wrestling with higher levels of debt. And then there's rising cost as we know for raw materials, energy and labor which is sparking inflation in world economies. And we're not immune to those factors, but we expect them to exert pressure on our gross margins in the first half of fiscal '12. But those external factors do not control our destiny. We do. We are well resourced and positioned to navigate the global economy to create competitive separation and to continue to deliver profitable growth. Now if you look at developed markets. These are markets that hold enormous opportunity for Nike. In 20 years, up to 65% of the world's population could be middle class. And most of that in China, India and Brazil, and we're performing very well in these developing markets and we're ideally positioned to capitalize on their potential. In developed countries, the economies are recovering at a slower pace, but the strength of our products and brands will enable us to continue to outgrow the market and grow the market. North America is a great example. Our number one market in the world and you're going to hear about that in a little bit, but enormous opportunity yet for continued growth in North America. The key for NIKE Inc. in any market around the world is to drive innovation at every level. That's the brand, the product, retail, operations, events, communications. So today is about providing context for you for our strength and opportunities. Tomorrow and beyond is all about possibility and we have a lot of possibility. As a CEO who came up through the product and design world, I know something about the nature of innovation. It's incredibly valuable. I would argue for a company like Nike absolutely essential, but it's also equally difficult. And that's where this company distinguishes itself from all others. And that's innovation. You can look back a year from now and see it as we have in South Africa and Huntington Beach. You saw some of that in the video and look forward a year and you'll see it in London. You'll see it in the NFL. You'll see it at the European championships. You'll see it in Brazil in 2014 and 2016. And frankly, I think you'll see it every day in between. We are just beginning to tap into what I would consider to be some real game-changing innovations. I mean, as a product geek, self-confessed product geek, I have never been more excited as I am today about innovation. Things like digital integration between athletes and technology. One-of-a-kind customization at scale, open source design a quantum leap, I think, in engineering and manufacturing that closes the loop on the one side and also opens the door to smarter products and higher performance. And this is the kind of change that we're focused on. This is where we're heading and this is where we're leading. The essence of Nike is actually very simple, we're innovators. We create change. This is, I would say, our obsession. It has been since the days of Bill Bowerman. Only today, it's at a dramatically different scale and scope. A year ago, I stood before you in New York and I said our goal was to deliver $27 billion in revenue by fiscal '14. And I'm excited to be here today to tell you that we are ahead of schedule so we're revising that number. When I look at the strength of this company and the opportunity we have going forward, I believe we can exceed that goal and reach $28 billion to $30 billion in revenue by 2015. And we'll deliver growth in the right way. This is very important, growth that's sustainable, profitable, capital efficient and growth that really continues to build real value in our brands which happen to be the most valuable asset that we own. And today, we're going to tell you how we're going to do that. And at the end of the day, I think if you take anything away and you remember anything about this company, know this, that we are relentless. We're relentless. So thanks for coming everybody. We have a lot of ground to cover today. And we're going to start with a look at our 4 affiliate brands at Converse, Cole Haan, Hurley and Umbro. And here to do that is our President of the Nike Affiliates, Roger Wyett. Thank you. [Video Presentation]

[Roger Wyett:]

Good morning, and indeed a very warm welcome. My name is Roger Wyett, and I'm the President of Nike Affiliates portfolio. The video you've just watched is of last year's U.S. Open in Huntington Beach where Nike, Hurley and Converse combined together to provide a wonderfully rich experience of surf, music and art. Over the course of a week, around 650,000 kids attended. It's a wonderful illustration of the power of our brands working alongside one another. There are 4 uniquely aspirational brands within the portfolio of the affiliates. Each brand expands our consumer reach while providing opportunity for growth and strategically each complements the Nike category offense. For example, think about Converse alongside Nike, Basketball and Jordan. Umbro alongside Nike Football or Hurley and Converse and Nike collectively driving our Action Sports strategy. Together, it's a wonderfully powerful formula for growth and consumer reach. Each of the affiliate brands is deeply connected to its own individual consumer through a sharp product offering and yet they all share the same common goal of putting the consumer first and knowing exactly what they want. So let's begin with the consumers and the importance of genuine long-term relationships. We know that kids live in a world that's ever changing. It's a social world. It's almost sensory overload. That it takes the need for clear communication and compelling product just to break through the clutter. We strongly believe that everyday consumer connectivity drives loyalty and increases purchase behavior. And I'll share through my presentation what that looks like for each of the individual brands. Consumer connectivity and loyalty are essential to driving growth. They all will give us confidence in the potential of the affiliate brands to be growth accelerators for NIKE Inc. Our fiscal year '11 results demonstrate this potential. The 4 brands which are reported with Nike Golf as NIKE Inc.'s other business represents $2.7 billion. If you exclude Nike Golf, the 4 affiliate brands represent $2.1 billion. The total wholesale equivalent which includes revenue generated from our licensed partners has a global footprint of about $3.8 billion. We have doubled our revenue in the last 5 years. We are on course to double revenue by fiscal ’15. This will drive a mid-teen growth rate, provide strong earnings, as well as we evolve our strategy of controlling our destiny through key market ownership. So what I'd like to do now is individually touch upon each business with a deep dive into Converse. Huntington Beach, California. It's the epicenter of the Action Sports industry and the home of Hurley. Hurley is an excellent example of a business that truly leverages Nike's expertise, resources and operational competencies. Fiscal year '11 business was $252 million in reported revenue, up 14% from last year. Hurley is an authentic surf brand, has a wonderfully inclusive culture that embraces a microphone for youth attitude. This mantra is the core of Hurley's DNA. Through the use of multiple channels such as Facebook, YouTube and blogs, Hurley naturally connects with consumers. It is a brand that punches well above its weight. Mark references [ph] the way we obsess upon disruptive innovation, brand and consumer connectivity. We firmly believe that key styles drive growth, as well as define a brand's position. Hurley's focus is boardshorts. It's a foundation of its growth strategy and indeed the Phantom borne out of a collaboration with Nike is a 3-time innovation boardshort of the year winner. Today, the Phantom boardshort leads the industry and is universally embraced by both athletes and consumers alike. In the last 3 years, it has gained over 10 market share points with the core consumer. We fully expect this growth to continue and we're in the phase of commercializing the Phantom properties into other categories such as woven shirts, shorts and outer wear. As mentioned, Hurley is successfully collaborating with Nike on the go-to-market process, particularly in retail, digital and disruptive innovation. We plan to expand the product assortment to a 4-season model, expand distribution globally and leverage the natural connection of the Hurley kid to the digital world to drive digital commerce. As a result, we expect Hurley will double its revenues by end of fiscal '15 to reach $500 million. So now let's change gears and move on to Cole Haan. The brand reset we discussed last year is yielding strong early results. Fiscal '11 revenues were $518 million which is up 12% against prior year and included positive retail comps. Men's footwear leads the way which was driven in particular by a leadership position in loafers and outfits. As you know, Cole Haan is built upon product integrity and craftsmanship. It is recognized for key styles that are consistently part of everybody's wardrobe for multiple uses. So the question becomes how do we keep it fresh and relevant today. The answer lies at the intriguing intersect play where work meets play. Increasingly, consumers such as ourselves are blending formal and informal. For example, loafers and wingtips are being worn in a variety of ways and a variety of places, both traditional and nontraditional. The individuality of style is the heart of the opportunity for Cole Haan. Much work has been done against traditional styles, mixing them with unexpected elements of color, texture and a mash up [ph] of materials. It's important to know that this strategy will be additional to our core business. We've also leveraged Nike technology to drive innovation into Cole Haan products. Nike Air has been a highly successful platform for Cole Haan. And we also believe there is greater commercial opportunity by leveraging other innovation in an unexpected way and bringing the 2 companies together. Although the initial focus for Cole Haan's strategic reset has been on men's, we are diligently working to elevate both women's footwear and accessories. Also the majority of Cole Haan's business is borne out of North America, but we believe there's untapped growth opportunity in Europe, Japan and China. As a result, we expect Cole Haan's revenue to reach north of $750 million by the end of fiscal '15. Moving now to football, the Nike brand continues to accelerate at remarkable levels as seen in last year's World Cup. We purchased Umbro with a long-term view to perfectly complement Nike Football. We see significant potential to leverage, not only the authentic football heritage, but also the lifestyle expression that the kids are looking for. Umbro fiscal year '11 revenue were $224 million, with another $300 million in estimated wholesale equivalent generated by our licensees. The England national team and Manchester City are 2 highly vibrant and visible partners that allow us to magnify the very best of the Umbro brand, from the pitch to the street. One symbolizes absolute national pride, the other offers a unique blend of football culture and music. Umbro’s unmistakably a football brand. With English roots, tribal passion and all the pageantry that goes with it. And it resonates to the kids in the streets and the stands. But at the same time, it offers a very modern sensibility. As we discussed earlier, the consumer connectivity between music, art and sport is well documented, but it's so relevant. Here seen the U.K. band Kasabian. Last year, debuting the England jersey in Paris in front of 5,000 kids. The bigger story, the unveiling moment, reached 7 million users through Facebook, blogs and YouTube. The even bigger story was over 400 articles were written worldwide reaching 25 million consumers. That's the power of connectivity. So as we look to next June and European championships, we see it as a galvanizing opportunity for both sportswear and performance. We have calibrated. We have celebrated English design [indiscernible] on performance wear. It is very innovative and we're definitely pushing the boundaries on the sportswear opportunity because we see it as significant. In the last 12 months, we have converted some key Umbro markets to direct distribution, including China and we're very deliberate in our strategy to put ourselves into a winning position. We are aggressively resetting the brand. It comes from a U.K. foundation, and we anticipate Umbro will double its business by fiscal '15. So let's just take a pause and shift gears now to Converse. But before we do anything, let me show you a video of this wonderfully exquisite brand. [Video Presentation] There is no doubt Converse is a crown jewel and it is the growth engine of the portfolio. It has over 100 years of rich and colorful and diverse history. Seems like every generation seems to discover Converse through their own unique product experience. In fiscal year '11, we achieved $1.1 billion in reported revenues which is up 15% over prior year. Converse is sold in over 130 countries. And including sales from licensees, there’s an additional $1.3 billion of wholesale equivalent business. This makes the brand a $2.4 billion global business. Converse's origins are grounded authentically in Basketball and it offers a natural adjacency to Nike Basketball and Jordan. Last year, the 3 brands came together at the World Basketball Festival in New York City and thousands of people were treated to an extraordinary display of street basketball, music and art with a headliner of JAY-Z. Converse also has deep-rooted connections within music as seen here. If you attend festivals such as South by Southwest or Coachella, you'll see that Converse is the brand for both fans and artists alike. Converse is a case study of a business built in the right way through a solid product foundation. Central to this is the Chuck Taylor, a franchise we have grown from 2 million pairs in 2004 to 70 million pairs today. That's almost 200,000 pairs purchased every day. Last year, we worked very hard to dimensionalize this franchise. We strategically managed the unit volume and we've diversified the assortment. Additionally, we are fiercely managing distribution and we are unrelentingly bullish on how we attack counterfeit product. Seems like few products resonate so personally as the Chuck Taylor. It's highly coveted, easily worn with a variety of outfits. The image you see here is the All-Star remix launching fall of this year. It's an excellent example of dimensionalizing design at a very high level, therefore further extending the franchise. It is only the very rare products that possess such timeless design elements. We've done premium collaborations with Sharks [ph] and Missoni for example, and we continue to fuel the desirability and the energy of Chuck Taylor on a premium and very limited level. An important part of our growth strategy, as we discussed last year is broadening and diversifying the footwear portfolio. Star Chevron, One Star and Jack Purcell offer unique styles and statements for consumers, and we're growing at an accelerated rate in each of these. Continuing the diversification theme, Basketball, central to Converse. We're realigning a strategy collaborating with Nike and creating a very gritty, streetsmart performance range that sits alongside Nike Basketball and Jordan. Likewise, we talked to you last year about apparels so what's the progress there? Well, we strategically resourced and invested, and the consumer is definitely showing there is an appetite for the product. We are very confident that the strategy which are built around key styles and key products as tees, fleece and denim will accelerate the business. And there's a strong collaboration across the Nike supply chain. Additionally, Jack Purcell, it's our fastest growing business within Converse, 50% year-on-year on the back of a really well-coordinated Jack Attack campaign. The brand is built upon timeless style. It's inspired by a 1930s badminton player and it's certainly an aspirational gem offering premium sportswear. To illustrate the diversity of Converse, think about you see a pair of Chucks at a music concert. You see Jack Purcell at a country club. You see both on many college campuses and it's growing. So moving towards now distribution. In the last 12 months, we have taken back control of the U.K. China will come in-house by January of '12. Again, the integrated strategy of assuming key markets is a primary enabler that will drive higher profitability. As you will hear later from Jeanne, progress in the last 12 months in retail and e-com within Converse has been very impressive. Recent launches at New Bridge Street, Boston; SoHo, New York have been unqualified successes straight out of the block. Factory outlet stores continue to drive growth, manage inventory and deliver healthy bottom line results. We are very bullish on DTC overall, especially as we accelerate and transition into key markets. Our online opportunity is limitless, primarily because of the enormous consumer base that Converse has. There are 2 brand pages on Facebook, Converse and Converse All-Star. They combine to reach close to 40 million fans. So in summary, the Converse brand has few peers outside of Nike. The talented and experienced leadership team is totally focused on prioritizing commercial opportunities. In addition to the organic growth, product, diversity, DTC and taking greater control of the large 3 markets will provide the foundation for sustainable growth. We are well on our way to doubling our revenue to over $2 billion by fiscal '15. So throughout this presentation, we have referenced the importance of leverage and collaboration across Nike. And we feel it's an amazing competitive advantage. But what I do want to call out that is a model based on a 2-way exchange. Collaboration and best practice exchange. And then furthermore, Nike's continued commitment to innovate for a better world is reflected within the affiliates. Converse, great efforts, $4 million to fight AIDS in Africa. Similarly at Hurley through the H2O program, largely a grassroots approach, we distributed enough water to provide clean water to over 4 million people in distressed areas such as Japan and Haiti. So as I wrap, the summary of the portfolio is that we are uniquely positioned to expand consumer reach and accelerate growth. We continue to make each brand the best they can be, based around key products and consumer connectivity. And we're all about attacking the biggest consumer opportunities through a diverse portfolio. As we articulated, it's a complementary strategy to Nike and it complements the category offense and we are confident we will double our revenues by fiscal '15. So with that, that's enough of me. I would like to thank you and I'd like to turn it over to my good friend, Charlie Denson, President of the Nike Brand. Thank you.

[Charlie Denson:]

Good morning, everybody. Welcome to Nike. Hope you guys are off to a good start today. I'm Charlie Denson, I'm President of the NIKE Brand and we're going to now shift gears and talk a little bit about a larger part of our business, all right? So just over a year ago, we talked about the power of the NIKE Brand portfolio and the use of that portfolio that allows us to continue to grow under all -- every circumstance. As we talked about that and we continue to grow, what we focused on last year were 3 competitive advantages. And these competitive advantages are something we're going to revisit again today. Three are building strong consumer connections that amplify sports. The second, delivering the most innovative and compelling products around the world today. And the third, it's creating, growing and transforming the marketplace with premium consumer experiences. So here we are a little over a year later and we're not only here to confirm our progress, but we're also here to notify you that we're ahead of schedule. So on that note, for FY '11 that we just wrapped up, on a currency neutral basis, as you know by now, the NIKE Brand registered its highest growth rate in a decade. Revenue was up 10% on a currency neutral basis and our growth was very broad based. We grew in every single category and every single geography versus last year, with the exception of Japan who suffered through some obviously tragic and extraordinary events last spring. So a lot of the news has been around the growth in the U.S. which was again very impressive, but it's really been driven by the global portfolio. Our Q4 revenue, it was up 12%, and that does include a double-digit decline that we saw in Japan for Q4. So as I said, we are ahead of schedule. Just over a year ago, I told you that the NIKE Brand would reach $23 billion by 2015. So today, we believe we are now on path to deliver $24 billion to $25 billion of annual revenue by that same date, 2015. So what's driving our success? Well, it's the category offense. It's that deep connection to the consumer. We started a little over 4 years ago, evolving our organization and realigning our go-to-market process to be able to access the category consumers. It's driven by that change of consumer and we talked a lot about that last year. These consumers, these young athletes are specializing and picking specific sports at a younger and younger age. They're specializing, and they're identifying themselves with the community that goes with those sports. This new organization alignment allows us to create much deeper and much more consistent connections with those consumers, 365 days a year. It's driving our growth across the portfolio today. Now we're getting better every season, but we still have a lot of upside in my opinion. We're still learning how to run this offense, as we get better and better. But I still believe it's one of the best decisions we've made over my 30-plus years here at Nike. We now have teams that are dedicated to each one of these sports, each one of these communities, each one of these consumers 365 days a year. But we haven't mastered it yet. We will continue to learn and to evolve in this ever-changing world. And today as we talked about those communities that I mentioned, they're fast becoming borderless, and in many ways they're becoming even more virtual. They're creating a whole new set of paradigms and they're eroding all the old ones. The shift in change is accelerating. But still, there are certain things that hold people together, that create global communities. Sometimes it's driven by culture. Art and music are also very powerful. But now even more than ever, I believe that the world of sport is a global community as well. Our category offense is really built on one simple, but very comprehensive concept. We call it amplify sport. It means we're connecting with and delivering on every aspect of the athlete's life. If you see these visuals here, you can see a great example. We start with the competition on the field. We introduce and explore the most authentic, the most compelling and the most innovative performance products in the world today. And that's where we earn our credibility with these great athletes. Then we move to training. For the athlete, it's where the hard work is. For us, as a brand, it opens up the access to the brand a little bit more to a little broader reach and a larger consumer base. And then finally, express. We believe sport is a lifestyle. It's where we leverage that brand identity, that credibility. And it's the biggest access point of all from a consumer standpoint. And you can see Allyson Felix, Kobe Bryant, referenced here in the visuals. These athletes are connected with the brand in every aspect of their life. We can supply that connection. We can also innovate in every single one of these dimensions. I'm happy to report it’s working. We saw every single one of our categories in fiscal year '11 deliver growth. We have strong momentum across the category portfolio for fiscal year '12. Trevor is going to spend a little bit more time going a little deeper about what goes on in our category offense in a few minutes. So let's shift gears and talk about product innovation. It's our second competitive advantage. Eric is going to talk to you about some of the specifics in a minute, but I want to reiterate how we leverage innovation and build brand strength across the entire portfolio and around the world. Innovation comes in many shapes and sizes. It comes from many, many places. But in Nike, it always starts at the same place, and that's with the athlete. It's our most important relationship that we have of all the relationships that we've developed throughout the supply chain. And we work with the best. They challenge us. They inspire us. And ultimately at the end of the day, they do define us. And through these relationships and these insights, we create products like the Mercurial Vapor seen here. It’s the latest edition of literally the boot that changed the way soccer boots were made and marketed. It's less than 200 grams. It comes with a custom fit and it has a new carbon plate technology. Then there's the Nike Free introduced here in Running. It's a natural motion technology. It was originally introduced clear back in 2004. Now today, it's one of our fastest growing technologies and it's something that we leverage across multiple categories, not just in Running. And then the Nike Flywire. Remember Beijing? We introduced it at the Olympics in China. Today, it is the lightest and the most stable upper construction of anything in the business, anything in the industry. And again, we can leverage it, not only in Basketball but everything from Running to Golf. As we think about innovation of footwear, it doesn't stop there. We use the same approach in apparel. Another great example is this last spring when we introduced our new France Football Federation kit. They are the most sustainable uniform that we've ever introduced into the market today. They're made from recycled material. And included in that is organic cotton. They utilize our Dri-FIT technology. And then to top it all off, it's a brand new, very iconic aesthetic when you saw the launch this spring when we began our relationship with the French Football Federation. But as we talked about earlier, innovation is not limited to just on the field. It's not limited to just the performance orientation. It's very influential and a big point of differentiation for us as a brand across the entire product line, whether it's through performance technology, construction or comfort and fit. It can be just as game-changing in lifestyle as it is performance. This is where we leverage key styles and concepts like the M65 jacket or the N98 track jacket seen here. Our next big opportunity to leverage this type of approach starts next April when we introduce the new NFL product line. It will start on the field and come to market all the way into lifestyle -- from lifestyle to performance. So innovation fuels our amplify sport approach. It is one of our basic competitive advantages and these advantages fuel growth. And they position Nike as a premium at every price point. So many people have asked me a lot over the last several months what I think about the increasing inflationary environment around the world and our ability to maintain our profitability. Seems like the question of the day, right? Well, what I am very comfortable in saying is that our innovation pipeline is fuller and more robust than ever. We have incredible brand strength around the world. So today as I stand here, I'm very confident that we will continue to provide the most premium, price value relationship across our entire product line. I believe we're operating from a position of strength and we will not compromise our long-standing commitment to our overall profitability. Okay, our third competitive advantage, create, grow and transform the marketplace. Critically important. Something we talked about again just over a year ago. We talked about this as an ongoing objective. Our goal is to create additional capacity for the brand in the marketplace and expand access for the consumer. Our charge to create new extraordinary consumer experiences, whether it's around the entire brand, around a specific category or even for a value consumer in our factory outlet stores. It can be Nike-owned or it can be with a partner. We have advantages and benefits to both. It can be focused and driven by products or category-specific. It can be by the -- focused on the brand, leveraging multiple categories and technologies across the portfolio. And it can be where we try new services like Nike+, NIKEiD or some of the new digitally-enabled products like the GPS watch you saw in the other room. It could be highlighting our newest and greatest or it can supply a brand enhanced experience to that value consumer who still wants access to the NIKE Brand. What we do know for sure, it is more compelling to the consumer than it was before, that it provides deeper and broader access to more of our products and more consumers. And ultimately, it drives incremental capacity in the market and revenue growth for the NIKE Brand. Probably the most robust example of transforming our marketplace to date is taking place right here in North America. Both through our own endeavors, as well as our partnered experiences. Whether it's in the Santa Monica store, the new brand experience that was introduced in Santa Monica and then we have a new store in Mall of America, as well as Roosevelt Field or applying the merchandising concepts around amplify sport in the Nike towns, New York, Chicago, San Francisco, et cetera. You can see it in the Dick's Sporting Goods Field House concept, where you're going to hear a lot more about that from Gary in a few minutes or our basketball execution with Foot Locker and the House of Hoops. And then there's the running execution, the Nike Track Club, with our partners in the Finish Line. All of that going on here in the United States in this marketplace. And on top of that, we expanded our factory store business this past year and grew it by 15%. We only added 5 new stores, but it brings us to 156 stores total. This all led to the biggest annual growth number in North America in 10 years. And the best quarter ever for Q4 where we were up 22%. Now while North America is most -- is the best example of where we're transforming the marketplace, I just want to hit on it, 2 other very key markets, very important markets for us over the next couple of years. They remain extraordinary growth opportunities for the NIKE Brand. That would be China and Brazil. So let's start with China. Let's go back a couple of years coming out of Beijing. We said we have one strategy. We want to undeniably win and we want to separate from the competition. We were going to do that with leadership from 3 categories. It was going to be driven by 3 categories

[Trevor Edwards:]

. Good morning, everyone. Just a little prelude to some of the things that we do every year. So I know that -- my name is Trevor Edwards, and I'm the Vice President of Global Brand and Categories for NIKE, and it's great to be here to give you an update as we continue to evolve our category offense, our consumer-segmented growth strategy. So let me start where I always love to start, and that's really about the consumer. The consumer landscape continues to shift. Digital trends combined with mobility continue to reshape the world. And they continue to reshape the relationship that consumers have with their friends, with their families, with the products that they actually use, they're more connected, and also with the brands that they actually connect with. At NIKE, we stay relentlessly focused on the consumer. And for us, that consumer is an 18-year-old who lives a fast-paced, socially connected life, enabled by technology. They live an on-demand world with information and services at their fingertips. And they get what they want, how they want it, when they want it. They're squarely in charge. And what's even more interesting and actually fun is that in this world, it continues to shift, and the pace is actually moving at an ever-increasing pace. So how do we capture the imagination of the consumer today? Well, we do this by focusing our business on the consumer so that we can understand their needs, their aspirations and their desires. So we created the category offense, which is really about dedicated business units that are focused on the consumer from design to marketing, to product creation, to sales and to retail. And the intent there is to make sure we have a team that really understands everything about the consumer. It allows us to relentlessly evolve and focus our business around the changing consumer needs so that we can know them better, we can out-innovate our competitors and most importantly, we can serve the consumer authentically in sport and in life. By understanding the consumer better than anyone else, we innovate by actually bringing them new and better products, new and better services or new and better experiences, even things they can't yet imagine. And we continue to redefine the relationship between NIKE and today's consumer. It's deeper, it's stronger than ever before. And it informs how we innovate across our entire business. And as we continue to deepen this relationship and grow our business, we see a tremendous opportunity to serve the consumer's total athletic experience. And we call that amplify sport, which is really the key to unlocking the power of the category offense by providing the consumer the best products, the best services and the best experiences while they compete, while they train and while they express themselves. Let's talk about fiscal year '11. This was a very, very strong year for us and up for our categories. And as you can see here, our revenue growth numbers have been great, right? And we'll continue to give you more detail about each of these categories. But as you can see, we've grown a lot since the last time we actually met. As we speak about the growth of the categories, consistent with how we've discussed it before, the revenue's numbers are actually wholesale-only in real dollars, while the growth rates are actually in constant dollars, just to give you a context. So let's start off by looking at one of my favorite categories, the most headlined of all, which is Football. I always love talking about football. The Football business continued to build on the great momentum that we saw around the World Cup in South Africa last year. This is a great example of the category offense in action. With the world's best teams competing on the stage, we saw incredible athletic performances, helped by amazing products, and we built a very strong consumer connection all around the world. First, let's talk about product. We used the World Cup to launch our Elite Series, Elite Series football boots, which were a powerful example of great product innovation. These boots were 15% lighter, and we enhanced the traction to make them faster on the pitch so that the players could actually change speed on demand in any direction they want. This is the power of great product innovation. We then went on to make them actually iconic orange and purple, and many of you might wonder why. We did that to increase the visual acuity for passing, so they could actually find their teammates better. In the end, 50% of the players in South Africa actually wore these boots. But we also brought it together in a very powerful story called Write the Future. And Write the Future leveraged every element of our marketing mix to tell the story in a powerful and integrated way. Part of that strategy tapped into the power of digital to deepen the connection with our consumers. So we took over the side of an iconic building in Johannesburg called the Life Center, and we used social media to allow anyone from anywhere around the world to actually put their message on the building. It was viewable all around the city. Very, very cool and fun. The World Cup is an amazing testament to the power of innovation. Innovation and product, innovation and connecting with consumers. And it was a great example of executing the way that only NIKE knows how to do. And then, as you heard from Charlie, we went on to launch the French Federation kits. Not only did we launch a great kit, but we also brought a great lifestyle offering around it, which has also done very well in the market. This is a prelude to our amplify football approach, and we're just getting started. And then we took that energy one step further. Our Bootroom concept continue to elevate the consumer experience at retail. So we created the ultimate destination for football teams -- football teens. It actually houses the best products, great services and a fantastic experience, and we rolled them out all around the market. So they're in London, in Paris, Milan or in Rio if you go to those markets. The Bootrooms give us a tremendous opportunity to enable and inspire our footballers in a way that's unique to NIKE. And they've also been a very great, strong growth driver for us. But more to come on the Bootrooms, because we'll continue to roll these out both at our doors as well as with our partners. Now, when you look at the body of work, it's no surprise that we had a very strong fiscal year '11. We grew the business 8% to $1.8 billion, on top of anniversarying the World Cup. It's a good year. Looking ahead, we will continue to extend our leadership in football. We've got the European Championships, we have the Olympics next summer. We'll continue to grow both our performance and our lifestyle business to create more separation in the marketplace. Let's look at another category. Let's talk about basketball. That's always a fun one. No one dominates basketball, the basketball courts, like NIKE. We have 3 distinct brands from Jordan, Nike Basketball and Converse, and we combine the history and the culture of the game to actually shape its future. A great example of what happens when you harness the power of the portfolio of these 3 brands, is what we did around the World Basketball Festival last summer in New York. From Times Square to the Garden to the Rucker Park, we brought together the very best players from around the world to compete and bring energy to the game. And speaking about energy, no 2 players or athletes bring any more energy and excitement to the game than LeBron and Kobe. And working with the best athletes, they teach you one thing

[Eric Sprunk:]

All right. Good morning, everyone. Last speaker before lunch, and it's going to be a really good one, I'm promising you. My name is Eric Sprunk, I'm the Vice President of Merchandising and Global Product. I'm going to spend the next several minutes or so before lunch talking about product, which is the most intimate connection we have with our consumer. Great products fuel the category offense and defines our brand with our consumers. And great product starts with innovation, the theme of my presentation today. Innovation has been at the core of NIKE since our beginning, and it is what continues to drive the growth in our Footwear business today. And I'll spend a couple of minutes with you talking about that. And then I'd like to update you on our Apparel business because one year ago, we spent quite a bit more time looking at Apparel. And I'm going to give you an update on that opportunity and talk about how innovation is driving our accelerated growth in Apparel. And we'll also talk about profitability and how innovation in that space drives results. And everybody in our industry talks about innovation, and many brands make innovation claims. And I believe at the end of our short time together, you'll agree that at NIKE, we live it and we deliver it. And lastly, in what is becoming a little bit of a tradition, we're going to show you a few glimpses of the future that I'm pretty sure will have you scratching your heads in bewilderment as you head to lunch. So let's start with Footwear. It is our nature to innovate as a company, and nowhere is this more evident and more important than it is in our Footwear business. We are blessed at NIKE to be able to work with the world's best athletes who compete at the highest levels across the entire spectrum of sports. We interact with these athletes every day to understand what features or products they need to help them achieve their best. How can we help them get a little bit faster? A little bit stronger? Jump a little bit higher? We bring incredible resources to bear to answer these questions, and we are at our best when presented with a difficult problem. Our interactions with our athletes produce unique insights, and these insights lead to breakthrough technologies, which ultimately become industry-leading pinnacle products. And this is great. It's a really important part of the innovation process. But even more important is that we expand on those big ideas and solutions that we have. In almost every case, the insight and solution for an elite athlete is also going to benefit everyday athletes in that sport. And sometimes, the benefits can span multiple categories. Truly successful and impactful innovation occurs when we take a breakthrough technology, leverage it across multiple styles, provide different levels of access for the consumer and ultimately, across multiple sport categories. And usually, both on and off the field of play. Nike Air was really the first great example of this. A cushioning technology that started in Running, expanded across almost our entire Running line and can now be found across almost every category, be it sport performance or sportswear and at several different price points. Another great example of this that you've heard a lot about is Nike Free. This technology was first introduced in 2004, meant to mimic barefoot running with appropriate protection. It came about from working with collegiate runners who were, in fact, doing part of their training regimens barefoot. This shoe has seen incredibly strong sales, and we continue to refine and improve on the core technology that is Nike Free. It's now in several of our sport categories at various price points. We've leveraged it across multiple styles within men's and women's running and within men's and women's training. We have even used it to provide first responders in the armed services with the lightest and most comfortable Special Forces Boot. And maybe most importantly, we have applied our learning through to literally thousands of products across our line. If the saying that imitation is the sincerest form of flattery is true, then I guess we should feel very flattered because many competitors are working to provide their own version of these shoes. At NIKE, we continue to provide shoes that are built on real innovation. Another good story where special innovation was launched in the marketplace and then we continue to grow it and evolve it, is Lunar. Lunar was first launched at the Beijing Olympics, born out of the desire to provide our athletes a more lightweight, more responsive, durable foam solution underfoot that delivered a new feel, we worked on Lunar for several years leading up to the Olympics. What we were able to deliver to our athletes is an incredible-feeling shoe. And while that shoe, the Lunar Racer, was a great success during the Games, it admittedly was still in the science experiment phase of product evolution for us. And from that beginning, we have broadened the offering within Running across a large extent of our line, including the incredibly well-received LunarGlide shown here in the third edition. And from those origins in running, Lunar has expanded into training, basketball, action sports, boots and sportswear. What was originally launched in Beijing as the Lunar Racer has now evolved into a significant underfoot technology with forecasted demand of over 16 million pairs this fiscal year. In fact, sports moments such as the Olympics often serve as a launching pad for our innovation. It is a great milestone in many of our athletes' careers and an opportunity to capture the attention of a global audience. And it makes sense. Where better to launch great innovations than on the world's biggest sports stage? That is true across the sports landscape. World Cup, NBA Finals, World Series, BCS, Grand Slam Tennis. But it is especially true for the Olympics. And wait until you see what we have planned for next year in London. I can't show you or tell you much about it, but the work we have for our athletes is really, really incredible. We will have significant innovation on existing technologies that are already a significant part of our business today, and we will introduce some new innovations that I think are going to amaze our consumers. Couldn't be more excited about what we'll be unveiling, both in terms of the benefits we'll bring to our athletes in terms of their performance, but also in terms of their commercial potential. And it will be these innovations that will drive our growth for the years to follow. So let's switch gears over to apparel now. We said one year ago that apparel is the biggest opportunity we have for growth in the company. And we believe it today more than ever. Great apparel in the category offense is already fueling great results, and we are confident that we will continue to accelerate our growth here. The apparel market is over 2x bigger than the footwear market, and it represents incredible opportunity for the Nike brand. Just as in footwear, our growth here will depend on innovation as the foundational element to delivering great product. At our investor day one year ago, I announced we were making a significant investment in apparel innovation, because we know the power innovation can bring to the apparel market. Several of the products we launched this last year, like the kit for the French Football Federation and the uniforms for our American football teams playing in the BCS games, showcase some of the amazing innovation we already have underway. Recycled polyester from plastic bottles, you heard Mark mention earlier; Dri-FIT fabric that wicks sweat, water-repellent fabrication, 4-way stretch woven fabrics, laser ventilation, Aerographics and much, much more. Another simple great example is in our basketball product. The Nike Elite basketball uniform we launched for the NCAA tournament here in the USA is almost 60% lighter than the uniforms we launched in Beijing. And it's over 50% lighter than the uniforms currently used by athletes in the NBA today. In apparel, it is especially critical that we make the innovations we deliver to our best athletes available to broader audiences, with appropriate products across our offering. In basketball, that innovation drives the performance of our Elite uniforms, and we take it right into the important short classification. As a result, our Basketball Shorts business has become more premium and is experiencing solid growth. It's up 21% in the last year alone. So innovation is clearly a key driver in apparel. But as we have talked about with you for the past year or so, to be a great apparel company, you also have to drive operational excellence. At NIKE, we call this mastering the fundamentals. To fuel the category offense Trevor just talked to you about, you have to have innovative crafted products and be clear to consumers what you're going to stand for across all of the categories. We realized a couple of years ago that we were making too much product. And as a result, we were spreading ourselves too thin. We were limiting our ability to drive operational excellence in apparel. We have made significant improvements. You can see in the chart behind me that we have edited the line, significantly reducing the number of styles. At the same time, we've put increased focus on applying or amplifying our most important items. This focus has paid off as the top 100 styles now drive almost a quarter of our total apparel revenue, up significantly from 2 years ago. And the number of styles with at least $10 million in revenue has more than doubled. In many ways, this is a reflection as to how many consumers see us as an apparel brand. And equally important is that we are achieving these results in a premium way. Almost half of our top 100 styles are at the better and best level, a significant improvement from just a couple of years ago. And these tiers are actually growing faster than our overall Apparel business. This is all indication that while we continue to make great investments in innovation, we also continue to get better at the fundamentals. This work is reflected not only in beautiful products in the marketplace, but also in great results. We believe our strategy is working. We have identified specific product in each of our categories that we think are key to driving the category offense. In Running, for example, shorts and lightweight jackets are critical. Our Tempo short, Trevor just talked about it, has been our number one apparel style for the past couple of years, and this year, grew an additional 50%. Our Lightweight Jacket business is 7x larger today than it was one year ago, all through a focus on innovation and operational excellence. In Women's, we say this all the time. You have to be great at bottoms and bras. Earlier, Trevor talked about the strong results we've seen from our new concepts, the Bottoms Bar and the Bra Bar. With our bras, we introduced a new fit system and a consistent chassis across the entire line, which resulted in over 40% growth for our overall Bra business. In Pants, just ensuring that we were clear with our product communication and reducing the number of styles, editing to amplify, we grew the overall business 14%. We have an incredible new introduction next month of our new Legend Pant that is beautiful, functional and iconic. There is unbelievable competition in this space. And while our product was already superior, it will get a great innovative new look and feel. And I'm confident we will accelerate our growth in this classification as well. Base layer is also critical. It is the third piece of the Women's sport wardrobe and is a critical piece of apparel for almost every teen kid no matter what sport they are playing. It also has become an iconic look of sport off the field for our consumers. In Women's, our base layer business has been number one in the U.S.A. for the past several months, and we continue to create separation from the competition. In Men's, we have increased our share every month for the past year and a half and have closed the gap in the U.S.A. by almost 25 percentage points in the past year and we believe are poised to be the number one brand there in the very near future. The U.S.A. is the key battleground in our combination of innovative crafted product that is clearly better than the competition. And now our commitment to operational excellence is paying huge dividends for us. Earlier, Trevor talked about our strategy to amplify sport. Taking the dominance on the court, on the pitch or in the training room and leveraging that across the categories is really critical. Many iconic styles from sportswear are so successful because they embody the look and feel of sport. Here are 3 of them

[Gary DeStefano:]

Good afternoon, everybody. How was lunch? Great, there you go. That's a good sound. All right, we'll start off. Good afternoon. My name is Gary DeStefano, I'm NIKE's President of Global Operations. When you joined us a couple of years ago, we talked to you that our job was not to manage the marketplace that exists, but to create the marketplace of the future. And what I'll talk to you about today is our continuing quest to create, grow and transform the marketplace. The other thing we'll discuss today is what Charlie and Eric and Trevor talked to you about earlier, our global competitive advantages. Certainly, the relentless flow of product innovation. The category offense, which as you saw in that 90-second brand video, that was brand activation in one country, one year, 90 seconds’ worth of highlight. Our ability to touch consumers all over the world in a relentless way as Mark said. And lastly, what Jeanne and I will talk about today is our ability and a capability to transform the marketplaces around the world. Last time you were here also, we started a new geographic focus. In fact, our segments are slightly different than most traditional players in the industry have. And I'll walk you through each of those geographic segments today and talk about the fact that we have accelerated growth in our new strategy, which was to focus on our largest opportunities in the world. The other thing we talked about last time was we believed we had a unique competitive advantage in our executional capability at the global level and at the local level. We said at that time that nobody has the ability globally like NIKE, the power of this brand. And nobody has the teams, as Charlie referenced earlier, on the ground like NIKE to execute locally. And nobody can do both of those things at the same time. And as we like to say, the Nike brand around the world truly never sleeps. The other piece we shared with you last time was a vision, a vision for what we called marketplace 2015. We talked that it would be a holistic vision. We would work with our partners in this industry to really be a catalyst for change. We said we would segment the market to create additional capability and capacity and accelerate our growth, to create new consumer concepts, exciting, energizing retail environments and that Nike Retail would catalyze that segment. We would optimize the strategy between ourselves and our retail partners so that our efforts were not cannibalistic. We would align with our retail partners in terms of a 3-year strategy so we could build and accelerate growth for both companies. And lastly, that we would create a new financial model for this industry. And we're happy to report that, that has worked and is working around the world. Transformation has begun, and I'll share more with you, that this is truly a global effort. You can see, whether it's our largest partner, Foot Locker in North America; or Sports Direct, who has been known as more of a value player in the U.K.; or Sportmaster, the largest player in Russia; Belle, the largest player in China; Kamo, the specialty retailer from Japan; or Centauro, our largest retailer from Brazil, who actually happens to be in town today and will be joining us for dinner tonight at the home. All of these transformations have happened. We have met and gone out and worked with everybody in their home court, if you will, and they have all been to the Nike campus and met all of the NIKE executive teams here. We have created 3-year strategic plans with each of these customers of how we'll transform both their comp growth rate and their financial profitability. And it's working. As everybody has said to you, we're very proud of the numbers that we're posting this morning and the efforts of the teams around the world to drive this level of growth for NIKE. 10% growth and an accelerating growth rate as we've said, and to generate an additional $1.6 billion of revenue in one year, larger than most of our competitors in this industry. And we believe we have the momentum to continue this growth as you see NIKE's futures numbers that have been posted yesterday. The balance of my presentation, we'll talk about the fact we believe we are accelerating our growth around the world, that we are creating leadership and separation, and that we are transforming the market. Let's start, and probably no surprise to you, in North America, our largest and most mature business, and as Trevor said, one we're very excited about. We'll show you some of the results, and we have not even started with the NFL yet. North America, probably what is a surprise to you, the unprecedented success in this marketplace. The growth rate here, 13% on revenue for the year, 14% on EBIT, continuing leveraging our cost structure. But most importantly, continuing to gain separation in this marketplace, the most important marketplace in the world. And I think again, you're seeing the futures numbers posted. We're confident in our ability to continue to generate the success in North America. I think the other piece that speaks to the North America business, we talked earlier about our ability to segment and more finely tune each segment of our business. And the more we focus on a business, the greater our ability to energize that business and to grow it. North America today has 6 businesses that are larger than $1 billion in size. And we believe we can grow each one of those segments in the future. Market leadership. It's not just about growth, it is about market leadership. And this is where NIKE really comes to the fore. Trevor talked to you about the category offense. We are able now, through the category offense, to come to the consumer 24/7, 365, in each and every one of these categories all at the same time. We are able to provide the retailer a continuous flow of new products in a way that was never possible before. And lastly, the transformation of the marketplace is really taking hold in North America. I think you've seen it in the results of some of these companies. Foot Locker was the first with the House of Hoops. People were surprised, what's a new basketball concept? But we know that the comps are outproducing the fleet of that store and outproducing comps in this industry. Dick's and the sporting good concept that they -- with Nike Fieldhouse at Dick's Sporting Goods, again, outproducing the fleet of their store and the comps in this industry. And the Nike Track Club, FinishLine, a new specialty running concept and a specialty market that nobody was investing in, a real transformation. And I think, more importantly, if you talk to the CEOs of each of those companies whether it's Ken Hicks or Ed Stack or Glenn Lyon, each of them would say to you they believe they're more strategically aligned with NIKE today than at any point in the history of their companies. Transform the marketplace is working so well that we're not asking them to expand that presentation. They're asking to accelerate the presentation of those stores. This is the plan that we have in place with each of those 3 retailers and additional expansion of the marketplace. I think the thing we're most proud of as we said, that we would create a new financial model in this industry. And we really have. You've seen it in the additional comp growth rates that have happened, you've seen the expanding gross margins, you've seen the expansion of cash flows in this industry. And as we are all watching the ticker backstage this morning, most of these companies are now sitting at 52-week highs in the industry. So a great result and more work to do on this front. Let's move to another major mature market for NIKE, Western Europe. We're very bullish on Western Europe. We think it has tremendous potential. It has been slow to growth in the past. The good news, we have returned to growth, and we are accelerating growth. I think more importantly, one of the major markets and the major opportunities for us in Western Europe, Germany. NIKE has posted double-digit growth this past year. And we're confident we can continue that growth. The other thing we really like about Western Europe is that it is becoming a performance-based market, and that plays to NIKE's strengths. It plays to our innovation. Our Running business was up double digits this year in Western Europe. Our Sportswear business was up, and was specifically behind our Football business. We're very proud to be taking over, as Trevor said to you, the French Football Federation. It takes us in the heart of the major French competitor, and puts us in the apparel business in France. And we believe sportswear and amplify will be a true growth strategy for us in this region. Amplify also allows us to transform the market, and there's no greater example than the U.K., as all of you know, our largest market. Again, a market that we have returned to growth. We have opened, which Jeanne will talk to you about later, 5 new Nike Pinnacle concepts in the U.K. in this past year. Jeanne will share more with you on that. We have worked with each of our wholesale partners to redevelop and transform the marketplace in the U.K., and I'll come back and share with you more on that. And we have expanded our Nike Factory Store business so that we can ensure the control of the Nike brand in the U.K., and we can create a premium market environment and protect the profitability of our retail partners who invest in these new and transforming concepts. And again, what we are really confident about is that the market has shifted to a performance-based market. Foot Locker is not just expanding House of Hoops in North America, but taking the concept internationally. The stores in Europe are working, and they're going to expand again on the continent. So as we talked earlier, Sports Direct, who has been known as the value player in the U.K., has bought an athletic specialty channel, a specialty sporting goods customer and soccer scene. And as you can see from this presentation, it's a far cry than what's happened in the marketplace in the past, and we're very bullish on that concept. And then lastly, a catalyzed concept off of Nike Retail and the running store that Jeanne will talk to you about from Covent Garden, our partner Sweatshop, has opened a running-only concept store that will expand throughout the U.K. It is a different market in the U.K., and we'll continue to transform that marketplace. And it's just in time for performance in Europe. As you can see, whether it was the French Open or whether it was Wimbledon or the Women's World Cup this morning or what's going on with the Rugby World Cup in the fall or the 2 most significant performance event that will come to the continent next summer. Performance is here to stay in Europe, and it plays to NIKE’s strength. The other thing we did that's different in Europe, Europe used to be for NIKE as a segment Europe, Middle East & Africa, and we wanted to narrow our focus on both the big 5 of Europe, and Central and Eastern Europe, so we created its own stand-alone region. It is now another $1 billion market segment for NIKE. There's also something very unusual about this market. The 2 major markets in this geography, Turkey and Russia, we're not #1 in either of those geographies. We see that as a great opportunity. In Turkey, we believe Turkey has the potential to be on par with Russia here in the near term. We have invested in Galetachera [ph], the most important cultural asset from a soccer and football perspective in the marketplace. It is the most important business in terms of the Football business, the Apparel business and the Sportswear business, and it comes with 49 of its own branded stores. Russia, we believe, as you know from prior meetings, it will be a mega market for NIKE. Our business there has been up double digits. As we talked to you about, we will have a different strategy than what our competitors have in Russia. We will partner with our wholesale partners to create this marketplace, and that strategy is working. Russia became our fastest-growing country in the NIKE world this year, and we continue to see great momentum in that marketplace. We believe Russia is on the path to be a $1 billion market and be a very important marketplace, not only for NIKE but for the world of sport. As you can see, Euro Champs in 2012, the Sochi Winter Olympics in 2014, and Russia hosts the World Cup in 2018. And Nike will be there for each of those events. Now Japan. The government in Japan has a strategy, one of hope, one of recovery, and Nike is the same. We're proud of the team. We're proud of the work they've done. We have recovered all of our business operations in Japan, and we think the team has been tremendous in terms of their leadership of our own team and recovering our business operations in Japan. But the story is nonetheless the same. NIKE's business is down 21% in Japan this year, certainly not what we expected, certainly not what we planned for. But I think what it does show is the remarkable story of the power of NIKE's geographic portfolio. At a point in time where one of our major business segments is down 21%, NIKE posts a historic high in revenues. I think it does speak to the power of the NIKE brand around the world. So there is one of hope, and there is recovery, but our strategy is slightly different. It's not of hope or recovery, it is of growth. We expect the team to grow this market. We are looking at Japan not as a business that has shrunk to $766 million, but as a $766 million business, that can be a growth opportunity of a $1 billion marketplace. We will focus on performance, just as we've done in the other marketplaces. And what we've seen in the last 8 weeks, performance product is working, whether it's NIKE Free, which Eric talked to you about, the Mercurial product or Trevor mentioned the Dunk product. Each of these products have launched into the marketplace post the earthquake, post the disaster. All have sold through at 40% and 50% in the last 8 weeks. We have momentum. We feel good about the brand and the potential in Japan. We continue to transform the marketplace and work with our partners. Saybio [ph], which transforms sporting goods; Kamo, which transformed the specialty business; and ABC, the largest value Footwear player in the marketplace, is creating a new segment of business, what we would call athletic specialty and taking the brand really upmarket, if you will. And lastly, one of the things that really does give Japan hope, it's baseball. Baseball is the cultural epicenter of Japan. It's a business that NIKE has not participated in for the last 5 years. We have re-entered the baseball marketplace this past spring, with our spring selling fashions [ph] that we had in Japan. We will work and lead the brand with Yu Darvish, one of the best athletes in all of Japan. We believe baseball will energize Japan. We believe it will energize NIKE, and we believe we can be a growth company in Japan and again, be a $1 billion segment. Now let's move to one of the most exciting regions of the world, a region that's defined very differently than other companies. China is not part of NIKE's emerging markets. But even without China, the macro trends are undisputable, 2.8 billion people, half of that youth, 1.4 billion, 640 million-person middle-class, twice the population of the United States, and just like everyone at NIKE, digitally connected and passionate about sports. We're accelerating growth in this market as you've seen. This year, emerging markets, again, without China, became NIKE's fastest-growing market in the world. Each of these countries in this geography grew at a double-digit rate. And we're positive, and if you saw the futures numbers, that this momentum will continue. One of the major countries that will drive the growth of this region is Brazil. Charlie talked to you about it earlier. No other country will host 2 major events coming up, and it's only happened 3 times in the history of the world. We believe that will be the ignition point for Brazil as a country. But it will not be the destination for NIKE. 2016 is merely a starting line just as Beijing '08 was for us in China. We believe Brazil has the potential to be a billion-dollar market. We believe by the time we come out of the Olympics, Brazil will be the third largest country for NIKE in the world. And if we want to look a little further out on the horizon to another major market, there's only one geography in the world that has 2 mega markets as part of its geography today. This is the emerging markets with Brazil and India. It is projected to be the fifth largest economy in the world by 2025. It is a marketplace that NIKE will build over time, just as we have done in China. One of the things that's really incredible in India, is not only it's the second most populated place in the world, but they're passionate about sport. They hosted the Cricket World Cup, the only culturally relevant sport in that country. This year, television, 700 million people watched the Cricket World Cup finals. 700 million people adopted NIKE's "Bleed Blue" campaign. We believe this will take us time to build, but you'll see it, as we play it out over the horizon, that India has the potential to be another billion-dollar market for NIKE. And lastly, but certainly a big topic of conversation for all of us over the last couple of years, Greater China and the momentum continues. The team here continues to following the positive macro trends. Obviously, the most populous country in the world, passes Japan this year in terms of second-largest economy in the world. You see the rising middle class, still incredible GDP growth, almost twice of what any emerging market country has. We're confident we can follow that trend and play as the market grows to what could be a middle class that some are projecting at 600 million people by 2015. Charlie mentioned earlier, we set a milestone in China this year, surpassing $2 billion in revenue, in a market that we talked to you about a couple of years ago we believe has the potential to be a billion dollars. You've seen our futures numbers. We're confident that we can continue to grow and expand this market. A big piece of that expansion will be the transformation of the market. Jeanne will talk to you more about NIKE's own presence in China and how we'll build and create the brand experiences. We will change what is predominantly a partner model brand environment and enter the marketplace 3 ways

[Jeanne Jackson:]

Good afternoon. I'm Jeanne Jackson. I'm President of our Direct to Consumer business here at NIKE, and for just a little bit of a reminder, Direct to Consumer or DTC, are all of our retail stores and our Digital Commerce businesses across all of the brands around the entire globe. Throughout the day, you've heard some consistent themes, I hope. Consistent themes around everything we do starts with the athlete. And relentless – have you heard the word relentless yet today -- a relentless focus on our consumer. The importance of innovation, innovation in product, innovation in process, innovation in operations and how these all come together to help create greater capacity for our brands and for our businesses in every marketplace in which we operate throughout the world. So all of these themes that you've heard today have a sharp point and that sharp point is in our stores and on our site, where we get the chance to interact directly with the consumer. Our Direct to Consumer business represents the area where, in its purest form, our brands can lead by example. It's where we help shape our markets, and we are able to create environments to showcase the strength of our category offense, that Trevor talked about, the strength of our innovation, the strength of our brand stories. It's the place where we commercialize the new digital experiences that we're creating. It's the place where the brands come to life. It's the place where we realize that moment of truth, which is what we call it, with our consumers. That moment of truth is where we get the chance to interact with them one on one, without anybody in the middle to make the story fuzzy. So a year ago, we introduced you to the pillars of our direct-to-consumer strategy

[Donald Blair:]

Well, good afternoon, everyone, and thank you very much for taking the time to come visit us. My objective at this point is to talk a little bit about what you've seen so far today and put in context and give you a clear picture of how we expect our business to perform over the next few years. I think you'll agree it's a pretty exciting picture. Over the last decade, we've focused on creating value for our shareholders by delivering strong results across 3 financial dimensions

[Kelley Hall:]

Hey, everybody. Hopefully, you enjoyed the day so far. So why not get us set up for Q&A. So while our speakers come out and take their place, just a couple of housekeeping items. I'm going to do my very best to work the room and get to as many people as possible in the allotted time, so I ask for your patience with that. And then the second is please wait until you have the microphone to ask your question, so that we can capture it for those listening on webcast. Okay? So we'll let our speakers get settled and get ready to go. All right, anybody want to start?

[Robert Ohmes:]

With the outlook that -- Robbie Ohmes from BofA Merrill Lynch. Don or for the whole group, with the outlook that Don just gave us, can you talk a little bit more about DTC growing faster than the rest of the business and how that could pressure the ability to leverage SG&A? Because I would imagine that puts upward pressure on SG&A as a percent of sales. So I understand you're going to leverage overhead but you keep the main accretion flat. And then DTC is supposed to grow significantly faster than wholesale. Can you sort of walk us through how you get back to leveraging SG&A?

[Donald Blair:]

Yes, what we've been doing is we have been offsetting the investments we're making in both DTC, as well as our innovation agenda by driving productivity in the rest of the cost structure. One thing to also bear in mind is DTC itself is becoming significantly more productive. As some of the things that Jeanne spoke to earlier have taken effect, we've had more velocity through those existing assets and that's helped give us leverage as well.

[Sam Poser:]

Sam Poser from Sterne Agee. I just wondered if you could -- you broke down the components of the gross margin on the last quarter. I wonder if you could give us how the merchandise margin versus airfreight broke down in Q4. And how you're thinking about that, especially the front half of the year?

[Donald Blair:]

I think the pattern we're going to see early on in the year, the first quarter is going to be very similar to the fourth quarter. There is without getting into the specific reconciliation of the numbers, about 2/3 of the lower gross margin number was really accounted for by the product margins, including the airfreight. There were some other elements we spoke to like logistics costs and the commissioning of the China Logistics Center and some other items. But basically, about 2/3 of the reduction was really product costs, including input and air freight. Did I not answer your question, Sam?

[Sam Poser:]

I just wanted, you did break out -- on the last quarter, you said it was 100 basis points of product margins, you said it was 50 basis points of airfreight and then you had 45 basis points going the other way. That got to the 105 in the third quarter. I wondered if you could give us that same kind of detail for the fourth quarter.

[Donald Blair:]

No. I think in just in aggregate terms, I'm not -- I don't think it makes sense to break all the numbers, there's a whole lot of other factors involved. So when you say we gave you that kind of a reconciliation, normally, we don't give it in that level of detail. But if you look at the 310 basis points for the fourth quarter, about 2/3 of that was input costs and airfreight, with some offset from some of the cost initiatives that Eric spoke to earlier.

[Sam Poser:]

[indiscernible] follow-up one more time.

[Kelley Hall:]

Real quick.

[Donald Blair:]

Third time's the charm, okay.

[Sam Poser:]

Because of the efficient -- because of these new, the 33% increase in the factory base that should be up and running by the end of the year, we would assume -- and the inventory levels now, we would assume regardless of what it is that the airfreight components of the gross margin should be the part in the back half of the year when you add in the price increases and so on, that should go away because those product -- the other margin pressures will remain likely. Am I thinking about that correctly?

[Donald Blair:]

Yes, that's correct. So what I would first caution you on here is, you can't make a literal connection between inventory levels and airfreight because capacity is not completely fungible. As we've talked about several times today, our Running business, for example, is up 30% last year. A lot of that was new technology, Nike Free, Lunar, various products that are not necessarily equated to the same capacity that produces an Air Force One or even apparel. So I mean that inventory number includes a lot of different product types. So airfreight as Eric said earlier is going to improve over the course of the year. We do expect that to be more in the second half of the year, not really in the first or the second quarter.

[Michael Binetti:]

Michael Binetti of UBS. I guess, when we think about the price increases that are coming up, obviously, everybody has tested their price increases and feels a little bit of confidence. But I don't know that we've seen the results or what to expect as the entire store starts to elevate prices with all the brands raising prices. So you've mentioned a few times today the price increases that you guys are putting through. Maybe you could tell us a little bit about what gets you confident that the consumer can absorb those other than just brand strength? But – maybe on products that aren't changing at all, they are just, just the sticker price is changing?

[Charlie Denson:]

Yes, I think, first of all, I think the confidence we have in the product, so the innovation that's coming down the line and some of the new products that are in prospect today gives us great confidence that we will pull. I think the other thing that we're looking at, I mean, we're looking at a potential price increase across the product lines but as far as [indiscernible], we feel very confident from a consumer spending standpoint that they're going to be able to absorb that price increase. We're not pushing the envelope too far, too quickly. I think over time, we'll continue to review [indiscernible] as we always do and price value relationship is really the long-term approach that we use to evaluate where we're at. And like we said all day long, I think we're going to stay committed to the overall profitability of the brand. I think Don talked about it as well, I think as you start to move into the second half of the year, some of these things will start to even out.

[Mark Parker:]

We've seen a little bit of a -- some increases already in DTC that -- where the consumer hasn't flinched. And then I'll just add the brand, the strength of the brand, I think, I don't think there's anybody in the industry that has the brand strength and the level of product innovation to Charlie's point, that we have coming. And then as we ramp up to London, next summer, I think that excitement is going to continue to grow. So I'm very confident, not cavalier but confident.

[Unknown Analyst -:]

Don, I was wondering if you could talk to us a little bit about the other income line as you start to realize the translation benefit in operating income, how should we be thinking about that directionally and is there any kind of magnitude that you can help us with?

[Donald Blair:]

We don't see there being major swings in that line. The conversation that we usually have on a quarterly basis is we tell you what the net impact is of translation of the P&Ls and other income and expense. At this point, we do expect there to be a fairly small headwind from FX in FY '12, that was embedded in all of the guidance that I gave you earlier. But we don't think that's going to be a huge set of numbers, if the exchange rates stay where they are.

[Unknown Analyst -:]

[indiscernible] operating income [indiscernible] from FX?

[Donald Blair:]

No, it means, we expect that line is broadly going to be about at the level it was in the fourth quarter on a quarterly basis.

[Omar Saad:]

It's Omar from ISI Group. Two quick questions, the Brazil target of $1 billion over time, can you talk about the tariff situation there and whether you have in-country sourcing and how you view pricing and the development of that market given the high tariffs there? And also wondering if you could address why it seems like Nike might be seeing a little bit more margin pressure as a result of inflation versus some of the competition. Is it mix? Is it a different mix? Is it pricing strategies that you are taking? Maybe you can kind of theoretically talk about why that seems to be the case.

[Charlie Denson:]

[indiscernible] We've seen some increases in tariff pressure in Brazil. One of the things we've done to offset that is primarily moved closer to the deliveries from China into Vietnam, which is currently not taxed at the same level. At the same time, we're increasing our local production capacity in-country and we're prepared to do that [indiscernible].

[Donald Blair:]

And I think with respect to the second part of the question, I'm going to let other companies talk about their margin equation. I mean, for us, what we expect to see is sequential improvement in margins over the course of the year. And that's really going to be fueled by all of the things that we do control that we talked about, things like lean manufacturing, the growth of DTC, tighter supply chain, less airfreight as was discussed earlier, as well as the price increases that are accelerating in the second half of the year.

[Faye Landes:]

Faye Landes, Customer Edge Research. First of all, just a little follow-up on the airfreighting thing and then I have another question. On that airfreight thing, you mentioned, Don, in your catalog of issues affecting inventory that airfreight was one of them. I just want to make sure I understand how that -- what you meant. And then the other question is, can you just comment on Western Europe, which was not mentioned at great length on the course of the day. But when you reported, we would see the profitability was down considerably, if you could elaborate on what's going on there?

[Donald Blair:]

Sure. The impact is just -- all of the costs to bringing the product and landed costs gets inventoried, so that was the element of the impact of airfreight on inventory. And with respect to Western Europe, we can have one of the other folks talk a little bit more about the business trends. From a profitability standpoint, Western Europe was the most significantly affected by foreign exchange in FY '12. And the major issue there was not that there was a major adverse move in the euro, it was that we had done a very effective job of hedging and that affected our FY '10 numbers. So FY '11, really, was more normalized. We had put some pretty long-dated euro hedges out, when the euro was above $1.50. So we had that benefit in FY '10. So that's really one of the major differences between Western Europe and the rest of the geographies.

[Faye Landes:]

So on a local currency basis, what was the profitability of western -- sorry, on a local currency basis, what would the profitability of Western Europe look like?

[Donald Blair:]

That question is almost impossible to peel apart because you're dealing with what would prices have been had you had different exchange rates and how each one of the currencies and the spending would have flowed through the P&L? And so we don't calculate it that way or disclose it that way.

[Paul Swinand:]

Paul Swinand, Morningstar Equity Research. I was wondering if you could break down your growth aspirations in China a little more. Obviously, the middle-class growth looks very promising. What segments do you see the most growth out of? What product areas? What sports? And then just a follow-up to that, I thought I saw something on one of the slides, where part of it was NIKE retail. I just want to clarify that's not owned retail, it's partner retail? But first let's -- if you could just clarify or talk a little more color about the segments?

[Mark Parker:]

The segments in China, I mean again, we're very bullish on the growth. As you mentioned, the middle class, the projection of 600 million-person middle class by 2015. So we see that trend, we believe in that trend. GDP growth, although there's been some concern that it's slowing as we said in the presentation, it's still almost twice as rapid as the other markets of the world. So we still see bullish macro trends that we're convinced on. On the product front and the market share, we literally stratified the product offering, so we can take more share at the premium price points, RMB 800 and above, we believe there's a marketplace even lower than that. I think some of the commentary that's been made in the past, that we will go from just Tier 1, 2 and 3 cities and expand our reach there. So that is something that we’ve worked on. We're picking up market share in that segment. So we'll do both, we'll make a geographic expansion. We'll make a product expansion and we think we can capture share both ways.

[Charlie Denson:]

I would just add one point here too. China is a little bit of a unique marketplace in the sense that all the monitoring [indiscernible] is a much better or more balanced mix between [indiscernible] as well. So [indiscernible] when you look at the mix between the 2. So we expect both of them to grow equally because of the off-ramp [ph] presentation [indiscernible].

[Jeanne Jackson:]

I think your question was whether or not it was [indiscernible] was partner [indiscernible] about that. There is, however, an important role that [indiscernible] will play in China just as they do in every market, the factory store make [ph] there is critical, maybe even more critical than in some other market. [indiscernible] partner [indiscernible] 80% [ph] of the product [indiscernible] Some of it is digital [indiscernible] time right now [indiscernible] so although half isn't crystal clear today, it is crystal clear that there will be a [indiscernible] opportunity and the [indiscernible] a critical role in helping them partner being how we want to show up. So it will take a pinhole [ph] in China that [indiscernible].

[Kate McShane:]

Kate McShane, Citi Investment Research. I wonder if you could quantify at all how much of the sequential improvement in revenue that we saw this quarter versus the last quarter was because of a change in capacity rather than a change in demand, sequentially? And over the long term, what does more capacity mean? If it sounds like you're building out more capacity for some of the more popular items now like Nike Free and Lunar. Over time, how does capacity come into play for your business?

[Charlie Denson:]

Well, what we said in the slides here was that, we're going to -- we think by the latter half of fiscal year '12, we'll have caught up with capacity and that capacity is really oriented towards those innovative products that you mentioned, Kate. And I think going forward, we feel like we're going to be better balanced between where our demand and our supply is. And so we're always on the lookout for good, solid, financially healthy partners in the supply chain and we'll continue to do that.

[Mark Parker:]

The other thing that I would just add is in looking at the overall demand [indiscernible] and giving ourselves enough flexibility to flex up and down as the future unfolds. So I think one of the things that takes that pressure off on [indiscernible], you make sure that you have flexibility in your supply chain to flex up and down [indiscernible].

[Donald Blair:]

Let me just add that the increasing capacity will really take root in this first half of fiscal '12. I mean, we've had some steady increases but the real ramp-up is happening in the next 6 months.

[Maggie Gilliam:]

I have a question for, sorry, it's Maggie Gilliam from Gilliam & Co. I have a question for Jeanne, please. Jeanne, could you elaborate a little bit about how you expect to ramp-up the e-commerce on a global basis? I'm thinking specifically of Brazil, whether you’ll partner or how you’re going to do it.

[Jeanne Jackson:]

E-commerce is, as we’ve talked about several times today, I think one of our biggest opportunity and the reality is that we need to make sure that we are relevant in each market and making sure that we're ramping in each market the way that market is evolving. And as many of you know, in different markets there are different phases in their evolution on e-commerce. They have an infrastructure, whether it's the ability to deliver a package by UPS. It's something we take for granted but that's [indiscernible] and you have to solve that. Whether it's a payment method, in some markets around the world have easy to get to payment method [indiscernible] today it’s cash on delivery, so it's something we usually [indiscernible]. Germany has a very robust, very easy to operate in e-commerce. So balancing market by market. And Brazil [indiscernible] us to make [indiscernible] incredible opportunity because the consumers there not only have a great affinity for our brand but they also have a great affinity for e-commerce. So while we're starting with a partner because it was a way for us to get there easily and efficiently, the long-term vision is for us to be there with all of our categories, in all of our sites, in all of our capabilities and have a really strong business. Does that answer your question?

[Christopher Svezia:]

Christopher Svezia from Susquehanna. I have 2 questions. I guess, first, just on gross margin. Down 100 basis points for the year, down 300 in the first quarter. As you go through the year, and you start to get better supply chain, maybe currency is not as much of a headwind, you get that pricing. Is there a point at which you can actually see growth in gross margin, I assume fourth quarter could be easy given the comparisons but is there an inflection point based on your guidance? And the other questions related to SG&A, just in terms of it's growing roughly in line with sales, give or take. And I'm just trying to -- curious about how you think about the leveragability of that SG&A and how we think about investments as you go into an investment year or fiscal year or 2012 with all those events relative to prior periods, whether Beijing, World Cup, same level or magnitude of spending or just kind of how you're thinking about that.

[Donald Blair:]

Okay. So at this point, I'm not going to give guidance on third, fourth quarter at this juncture but I think the math is correct. We do expect to see with the margin guidance we just gave for the full year and what we gave for the first quarter, we expect sequential improvement and we do think it will be positive by the end of the year. So yes, without giving individual pieces of the equation. With respect to SG&A, the guidance we gave said, yes, we do expect to gain some leverage. If you looked at what we said about the rate of growth, it's not going to be huge amounts of leverage in this particular year largely because of some of the factors that you just discussed. But we do expect to gain leverage and we do that when we are still investing in DTC, still investing in our innovation agenda. So we are always positioning our spending against the highest growth opportunities in the business and really driving productivity in the other parts of the business.

[Eric Tracy:]

Eric Tracy, FBR. Another disruptive or potentially disruptive force out there is the looming lockouts of NFL and NBA. Maybe if you could speak to prior lockouts, the negative impact you saw, given the uncertainty, how you think about planning the businesses, particularly on product launches as you enter into the NFL agreements? Certainly, you're dominant in basketball, how should we think about that?

[Mark Parker:]

Well, I'll take the NFL first. So obviously, we're hopeful that there aren't any lockouts. So but the reality is, with the NFL in a lockout now, it hasn't affected any of the scheduling yet. We're optimistic that it won't. But for us, in our relationship with the NFL, it doesn't go into effect until next year. So I'm not going to make any guarantees but hopefully, they're not locked out still when we get to next April and it shouldn't affect our launch as we move into that relationship. As for the NBA, I think and if you think back and compare it to previous situation, labor issues around the NBA, which you’d have to go back 5 or 6 years ago, we had a limited relationship with the NBA itself obviously, with the players much more direct tied to the business. And depending on what happens here, we will continue to utilize the players. I think there was a reference already about all the players that are going to China this summer. And I think everybody is very excited about that, including the players. As well as -- we have a very, very dominant footprint in college basketball. And with the absence of an NBA schedule, college basketball will become that much more important. And I think that's going to be -- it's a great position to be in from a basketball standpoint, if there is a labor issue that might affect the season.

[Brian McGough:]

This is Brian McGough of Hedgeye Risk Management. Is it okay if I ask 2? So I guess, first, I don't know if it's for Jeanne or Mark, Don, Charlie, but as I look at NIKE Retail, and I think, Don, I might be stealing your line here, but it's been a little bit like Big Foot in that we've heard a lot about it may be making money but we've never really seen it. And I know there's been a lot of capital that's been put into it over the past 2, 3 years. It looks like it's actually starting to work. And I'm wondering if we should look at it as a stand-alone business or if the costs that are being put into Retail are actually helping out the wholesale part of the business, is it fair to split them both apart. Or should they be looked at holistically from a margin standpoint?

[Mark Parker:]

I'm going to just touch on the general point that our DTC business is actually really -- my point, my position, our position is that DTC is really helping our overall business on the wholesale side. I mean, I've said many times before that the investment that we're making in DTC is actually going to make us a better wholesale partner and I really believe that's true. I think the combination of DTC with our category offense has actually made us a much stronger company over the past 2 to 3 years. Everything you have to do to be successful in Direct to Consumer is really in a sense a microcosm of what you need to do to be a better company. And I think that's really playing out as we -- as you can see, with some of the premium brand expressions that we have with some of our key retail partners and a lot of that is because we're actually a better retailer not just qualitatively, but quantitatively. So Jeanne, do you want to…

[Jeanne Jackson:]

Well, the good news I can report is we are becoming more profitable. In the last fiscal year, our earnings, the EBIT growth, greatly outpaced the sales growth and we thought the sales growth was pretty good. So we're getting more productivity, we're getting more profitability. And things like the factory stores and digital are some of the most profitable things that we do. So as those things grow and as those things grow faster than the base, we're seeing increased profitability and increased leverage. The first cost margin is very strong. I've worked for vertical retailers in my life and these are pretty strong first cost margins to work with. So we've got some runway and we've got some capability. But that said, the big leverage is in, as we become better, helping those mono brand retailers around the world whether they're in Turkey or China or wherever they are, helping them apply the same principles, so they're more efficient because then they'll be more profitable and we'll be more profitable. So that's the big win is when we get all 3 of those working at the same time.

[Donald Blair:]

I'll just add one thing. I think from a -- I think when Mark kind of spoke about it, from a category perspective, one of the reasons we're able to see the success that we see is because we work very closely with our own DTC stores. And so we can actually test out these concepts, or we can focus our work against our DTC that allows us to leverage it through the wholesale trade. So whilst from one perspective, you can look at clearly the profitability of that part of the business, importantly as we look at it in terms of how we operationalize the category offense, we learn so much through actually operating through the DTC stores.

[Mark Parker:]

This is a great risk of over answering the question here. But I wanted to just be very clear about one thing, which is to Jeanne's point, the digital piece and the factory outlet stores are some of the most profitable things we do. And on the in-line side, which you have to bear in mind is some of these stores are really the pinnacle presentation. Those of you who have been in the Niketown stores are extraordinarily exciting category presentations. Those were not always designed to be more profitable, replicated types of formats. What we are now seeing in the new format that Jeanne spoke to is a completely different thought process around how we're doing retail. This is retail that is going to be both profitable and brand accretive and we're on track to do that.

[Brian McGough:]

And then just one other quick question. I think this is an Eric question, I'm not sure though. I actually thought that we'd see a little bit more about extreme sports just given that you guys have a great message out there right now. I think like a really big one, one of the biggest that you've had in a long time. Mark, I know this is one that's very near and dear to you. And I think most importantly, you've got the product actually to back it up. I stepped out for a couple of minutes, so maybe I missed it. But if in case I didn't, could someone spend a couple of minutes just really talking about?

[Eric Sprunk:]

Yes, absolutely. Yes, obviously, we had so many categories to kind of take you through. So obviously, we chose not to show Action Sport this time. But we continue to be very excited about our Action Sports business. It actually grew about 14%. So we felt very good about that. We're certainly seeing great growth within North America and it continues to grow. But also, we have a portfolio strategy, which we work with our affiliate business to kind of drive it. So we feel very confident about that business. We saw some slowing in Western Europe, but we've certainly working through that as we continue to roll out.

[Unknown Executive:]

And I'd add to that too because obviously with the portfolios both Hurley and Converse, it's incredibly important. Hurley has had another good year. And as Jeanne mentioned this afternoon, the new Salvation store, which is opening up in Malibu on a second door is very exciting with the multi-brand category. So definitely something to look out for.

[Unknown Analyst -:]

Yes, a couple of quick questions. Don, with respect to hedging, you mentioned implementing a trading company structure. What does that mean? And how does it change how we think about your hedges?

[Donald Blair:]

Well, it's not something that if you were building a model for next couple of quarters, you wouldn't necessarily see the impact of that. But the impact is that we are now funneling all of our transactions with factory groups and the various countries in which we do business through a hub, which lets us use the natural offsets of currency to reduce the level of currency exposure. So one of the things that is one of the macroeconomic factors that drives our business is foreign exchange. Sometimes, it's to the plus and sometimes not. What this does is it takes all of our sales in various currencies and our product purchases, which will increasingly be in multiple currencies and lets us net those together, so that we have less volatility from foreign exchange.

[Unknown Analyst -:]

Okay. So does it reduce the cost of your hedging?

[Donald Blair:]

It does reduce the cost as well. But the main fact here, for example, with China, we are largely net 0 in China, the size of our purchasing and the size of our revenues are basically net 0. So our renminbi exposure is relatively small.

[Unknown Analyst -:]

Okay, that's helpful. So no change to the philosophy, just change in the...

[Donald Blair:]

No change in the philosophy but a more efficient vehicle.

[Unknown Analyst -:]

Great. The second question, you mentioned price increases with respect to fall and holiday, is that different from what you talked to us about, after the fiscal third quarter? Has there been any kind of retroactive price increases that have been put in place?

[Donald Blair:]

No, nothing of significance. I mean, when we can take price increases at retail, price sensitivity and playing that but nothing has changed of any material impact. Most of the price increases that we talked about last quarter will go into effect spring.

[Unknown Analyst -:]

Don, you mentioned the shift in shipments in North America, I think, being part of the reason that sales are going to grow below futures in Q1. Can you quantify what that was, how much it helped Q4 and how much of a drag it is specifically on Q1?

[Donald Blair:]

No, I don't want to provide that level of detail at this point. But what I would tell you is if you look at the underlying trend lines of the business, for example, the futures order book, which gives you the order pattern and that's not muddied by the shipping pattern, you can see the strength of the business in North America.

[Taposh Bari:]

Taposh Bari with Jefferies. I wanted to ask you a question about Converse and Umbro as you take that business over in China. Can you just kind of talk about the, maybe financial and qualitative opportunities there? And maybe contrast that to what happened with NIKE when you took over that business a few years ago?

[Mark Parker:]

So on each of those, as you saw this morning, China offers both Umbro and Converse much upside in opportunity. We see definitely taking a lot of what is happening, out of the U.K., for example, in Umbro or out of the U.S. in the Converse case, and we see there's an awful lot of consumer connectivity and opportunity just as we built the model in other places.

[Roger Wyett:]

You'll see more of an immediate upside opportunity on the Converse side and then Umbro will be a bit slower build. But both brands, obviously, have a long history and heritage and both we see a tremendous opportunity for growth in China.

[Unknown Analyst -:]

Scott Emrin [ph], Westfield Capital [ph]. Just a few unrelated questions. Can you just speak to whether or not you anticipate any meaningful change in the mix between futures and At-Once business? Secondly, your China business is much more profitable today than most of your other geographies. If you can just speak to the sustainability of that? And then thirdly, if you could just talk about the cost environment for key sports marketing assets and maybe differentiate if it's meaningful between sports marketing assets in China versus here in the United States?

[Donald Blair:]

Okay. There's 3 questions. Some of which I can answer all of the above and then we can break them out. So the At-Once futures mix, we don't see it continuing to diversify much more than what we've talked about. I think as the business grows incrementally across the business model. We talked about always available. We talked about our retail footprint continuing to expand. But I don't see -- the futures will still be the best indicator for future possibilities, opportunities and how to measure the business. I don't see that changing anytime soon. Second question was China and...

[Unknown Analyst -:]

Absolute level of profitability?

[Donald Blair:]

Oh yes, I think -- one of the interesting things about China, I think that it will continue to be as profitable. But actually, the third question relates to the China model a little bit, which is -- especially in sports marketing. China is able to actually leverage the global assets much, much better than probably any other business of scale or scope. So whether it's Kobe Bryant or LeBron James or whether it's Manchester United or Wayne Rooney or Cristiano Ronaldo, all of those costs actually sit out in the respective business units, where they're housed and China leverages them. So that being said, we're going to see China sports marketing assets start to accelerate as that business accelerates as the competition accelerates there in China. So I would expect that to have somewhat of an impact on the overall profitability. But still, very, very moderate.

[Unknown Analyst -:]

Ini Anzardo [ph], Capital Group [ph]. Can you talk about how you're gaining access to distribution in sort of Tier 2, Tier 3 cities in China?

[Gary DeStefano:]

Yes, I think the expansion of the distribution has been a plain strategy. As you know, we went in and basically focused on the 3 major cities and I think that strategy was very successful for us. And I think over time, people are saying, "Hey, you need to be more aggressive." And we actually did quite a study and found out that we needed to be more aggressive in those other tiers of cities and that we're, in fact, losing share there. And there is, in fact, very little overlap between ourselves and some of the local brands. So that has been a strategy that we have access to those other marketplaces. So it's typical to what we're doing. We would look at the marketplaces, we would create the strategy for distribution in those marketplaces. And as we said today in the presentation, what we believe will be different over time in China what is today a monobrand marketplace, we believe NIKE Retail will be a catalyst for changing some of the secondary cities in the future. We've stayed in the major cities today. We believe over time, multi-brand will exist in those marketplaces. So today it's really about differentiating the monobrand partners that are there and working with those monobrand partners to make their doors more productive and more profitable in those cities. And basically, the distribution is there. We're going to leverage the distribution that's there and work to make it more profitable and more productive for our partners and ourselves.

[Mark Parker:]

You're going to see deeper penetration, obviously, not only in the Tier 2, 3 but 4, 5, 6 from NIKE. But as Gary touched on, I think the future is 1, 2 with the NIKE Brand. Umbro, Converse will be a multi-brand strategy against that market. So we see when we actually combine multiple brands, we're really at looking the portfolio against the opportunity in China, I think there's a huge growth potential.

[Eric Sprunk:]

I'm going to just add as Gary articulated, we talked this morning about collaboration and leverage, having the other brands, whether it's Converse or Umbro, coming in alongside and learning best practices and gaining efficiency. Whether it's on distribution or even whether we plug into, say, something such as basketball through Converse. So obviously, the adjacencies and the complementaries will definitely be top of mind.

[Gary DeStefano:]

It was a great learning, in the study, when we did the study is to look at the fact that we were very complementary and not overlapping with our affiliate brands. And that was kind of a key tipping point to our strategy to say, “Hey, we need to really accelerate that strategy.”

[Mitchel Kummetz:]

Mitch Kummetz, Robert Baird. Don, on the 2015 mid-teens earnings growth plan, a couple of questions. First, is there an operating margin target embedded in that plan? I know you talked about both operating margin expansion and the financial lever, I'm wondering if there's an operating margin target embedded in that. And then secondly, once we get past 2012, as you think about operating margin expansion into 2013, '14 and '15. It sounds like gross margins, they were down 70 bps last year, expect to be down 100-plus this year. As you get past 2012, does most of them -- operating margin expansion come from gross margin or SG&A? Is there any way you can kind of provide a little color on that?

[Donald Blair:]

Well, first of all, I think the math is inescapable. We do need to expand operating margins if we're going to grow revenues at the high-single digits and earnings in mid-teens. And as we said, there's those 3 drivers

[Faye Landes:]

Faye Landes again. First of all, 2 things. First of all, on the Europe thing. Can you just talk a little bit about the specific countries, the main countries in Western Europe? You talked about some of them but not all of them. You talked about Germany, a lot. Germany more and it's doing better. U.K. a little bit less and then didn't talk about Italy, if you address that. And then also just on apparel, based on your results and results of other companies selling athletic apparel, it certainly implies that the market for athletic or athletically-inspired apparel is growing quite significantly. Is that a correct perception? And can you just elaborate on that?

[Gary DeStefano:]

Yes. Sorry, Faye, we couldn't address all the countries. But again, we're trying to spin the world in 20 minutes there. So it really, as we said, we focused on the big 5 countries in Europe. The good news is that all of those countries are back to growth. So that's a significant departure from where we've been in Western Europe. So we're pleased with that. To your point, it's been a tough economic year. So in some of the countries, specifically the southern countries, Spain and Italy have been more difficult in terms of the macroenvironment. So that business is still doing well. What we like best is what we said earlier that the performance business is doing particularly well. To your point, the Apparel business is a great opportunity for the company and what Trevor talked about in the presentation, our ability to amplify sports, specifically Football when you look at the great Football assets we have in Europe. And you look at each of the countries, we talked specifically France and we didn't go into depth on the business. But when you pick up the French Federation, you look at all the assets we have whether it's Barcelona in Spain and they win the Champions League or it's Manchester United and they win the Premier League, we can literally now go anywhere in that portfolio and drive the business and drive apparel and drive footwear. So again, we think that should be a growth business for us.

[Faye Landes:]

[indiscernible] apparel is doing U.S. as well.

[Donald Blair:]

Yes, you know, first of all I agree with your observations on athletically-inspired apparel. We're seeing our futures strength in that area. If you look at our futures, up 15%. I mean, that's equally split between footwear and apparel. We think we have a unique position on the performance side of apparel. And that can help us drive, again, a more unique proposition on what we call the express or the Sportswear side of the business as well. We focused as Eric pointed out, I think in his presentation, a lot more on key items. We've gotten a lot more efficient in terms of focusing on those styles and getting more productivity per style. I think there's still more upside opportunity for NIKE as far as that's concerned. And then I think as you look across the portfolio, particularly with Converse and then Umbro as well and obviously, Hurley, there's some major upside on the apparel side. So we're bullish, we're very bullish on apparel and it's obviously, a really key part of our growth strategy.

[Mark Parker:]

One callout again is that too that I would make and I think each presenter called it out this morning is the correlation between one, performance and Sportswear is very significant. And two, having key items both driving growth, as well as defining the brand. And I think you see that when you walk next door and you see the power of strong items that the consumer can connect with and you keep coming back.

[Kelley Hall:]

So we'll take one more question.

[John Zolidis:]

John Zolidis, Buckingham Research. Can you just comment a little bit about NIKE inventory in the U.S. Retail channel? With the inventory units up, I guess, 23%, do you think that there is not enough inventory in the channel? And then secondly, you outlined and you've got these great programs with your retail partners, the Track Club and the House of Hoops and the Field House, do you think that they have achieved a differentiated assortment of NIKE products? Or is there still too much overlap out there amongst your key retail partners in terms of the product they have from Nike?

[Roger Wyett:]

I'll try and answer both of them. So the inventory levels, I think it's one of the strengths of our companies. I think no company in the industry has worked harder or probably had greater success in maintaining what we call a pull market in the industry. So our model is definitely pull, we try to create the demand as opposed to push the product and the inventory into the marketplace. So I think we're doing that. We work very closely with the retail partners in terms of monitoring their sell-through and they work very closely with us in terms of helping them with their inventory and the flow of that inventory. I think one thing we're better at than we've ever been as Trevor said and as we talked about with our own DTC experience is the flow of that inventory into the retail partners. So we're much better on the flow and I think that's working for everybody. We're not just loading a bunch of inventory in at the beginning of season. We're doing a much better job of flowing that inventory. In terms of differentiated assortment, it almost feels like a retailer question. So I would say every retailer in the industry would say, "Hey, we would like to be completely exclusive." And I think what we have done a much better job on as opposed to being just have exclusive product is to let to differentiate the consumer experience. And so I think all the retail partners who have worked with us on this strategy to how do I create a differentiated consumer experience versus let's just have an exclusive shoe. And I think that's made quite a difference in the change in their stores, change of their presentation and certainly, the consumer experience.

[Mark Parker:]

Yes, and I’ll just add to that one and just say that when we think about it, we think about it in terms of distinction. How do you actually allow the retailers to have better distinction in the marketplace. And I think that the category offense has actually allowed us to have distinct formats that we can flow products through and because we stay focused on that consumer every single day, every single season, we can pull a consistent story through those stores. Prior to that, it would have been a hit or miss. So I think that -- what it has allowed us to do is create -- increase the capacity of the marketplace but also increase the distinction between our retailers, which I think the consumer is then having a better experience. And so House of Hoops is a great example and we see that with our Foot Locker. Obviously, the Track Club that we do with FinishLine, another great example. So we're definitely seeing that as something that has really struck a nerve with our consumers and we’re delivering that all the way through our business model.

[Trevor Edwards:]

The last thing I would add is just what we've talked about all day long that opportunity to leverage both lifestyle versus performance and being able to complement each side of the closet, so to speak, of the consumer, really adds much more accessibility to broader capacity and growth for the NIKE brand and it's something that we're focused on.

[Kelley Hall:]

So I want to thank you all again for being here today. And to those of you that participated via webcast. A couple things. I will look forward to chatting with you, the management team and I, next door, so we'll meet you there shortly. And housekeeping item, we have copies of the press release that went out across the wire following the prepared remarks today. So if you want to grab a copy on the way out the door, you're welcome to do that. Thank you, again.