NIKE, Inc.
Q1 2013 Earnings Call Transcript

Published: 27 Sep 2012

[Operator:]

Good afternoon, everyone. Welcome to NIKE's Fiscal 2013 First Quarter Conference Call. For those who need to reference today's press release, you'll find it at http

[Kelley Hall:]

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE's first quarter fiscal 2013 results. As the operator indicated, participants on today's call may discuss non-GAAP financial measures. You will find the appropriate reconciliations in our press release, which was issued about an hour ago, and at our website, investors.nikeinc.com. Joining us on today's call will be NIKE, Inc. President and CEO, Mark Parker; followed by Charlie Denson, President of the NIKE Brand. And finally, you will hear from our Chief Financial Officer, Don Blair, who will give you an in-depth review of our financial results. Following their prepared remarks, we will take your questions. [Operator Instructions] Thanks for your cooperation on this. I'll now turn the call over to NIKE, Inc. President and CEO, Mark Parker.

[Mark G. Parker:]

Thanks, Kelley, and hello, everyone. I believe our Q1 results illustrate something core about NIKE, Inc. and the business we're in

[Charles D. Denson:]

Thanks, Mark. Good afternoon, everybody. Q1 delivered strong growth for the NIKE Brand, and we're off to a great start for our fiscal year '13. We refer to Q1 as the Summer of Sports, and it's highlighted 3 important competitive advantages for NIKE

[Donald W. Blair:]

Okay. Thanks, Charlie. Like the global economy, growth across the individual components of NIKE, Inc. will not always be uniform. As both Mark and Charlie discussed, the strength of our portfolio allows us to invest in opportunities for growth while delivering consistent profitability. Let me highlight 3 points to put this into context

[Operator:]

[Operator Instructions] Your first question comes from the line of Kate McShane with Citigroup.

[Kate McShane:]

I was wondering with regards to your guidance that you just gave, how you should be thinking about price increases going forward? I know you're going to be lapping some pretty big price increases that you took across your portfolio at the beginning of the calendar year. So I wondered if you could maybe give a little bit more detail on that.

[Donald W. Blair:]

Well, Kate, what we expect to be doing as we go forward -- and this is not just an FY '13 approach, but we are doing season in and season out work to make sure that we've got the price-value equation in the right place across our line. So we think what you'll see for fall of -- what you saw for fall of 2012 and into holiday of 2012 and then onto the spring and summer is not as much of an across-the-board type of price movement as you saw in the last couple of seasons, but a lot more style-by-style, product-by-product price increase. So we do expect, over time, we're going to see more pricing certainly in the next few years than what we saw over the last 10. But you're not going to see the same kind of across-the-board price that we saw in the last couple of seasons.

[Kate McShane:]

Okay, great. And then for my second question, I know there's a lot of moving parts when it comes to China with all the different things you're doing to better position the brand and hold the category offense. But near term, once you do get through the Sportswear inventory, what is your expectation for that Sportswear category? What is going to drive that Sportswear category to be more of a driver of growth [indiscernible]?

[Charles D. Denson:]

Kate, it's Charlie. Well, I think, certainly, our ability to flow and merchandise the products into the retail marketplace is something we're really focused on. Retail productivity and profitability is a major focus going forward. I think it's paramount in the execution of the Sportswear strategy. With that said, continuing to balance the offering between performance and Sportswear is really where we're ultimately headed. I think something else that we've realized is continuing to really tailor a specific fit for the Chinese consumer is important, especially in the apparel side of the business and we're working on that. So we're still very bullish, long-term, on the opportunity, whether it's from the Sportswear side or the performance side. I think as we've said many times on the way, this -- the Amplify Sport approach, where we really build the brand off of our core [ph] performance positioning and leverage that into the Sportswear arena is the way that we will attack the Chinese market just like we do the rest of the world.

[Operator:]

Your next question comes from the line of Robbie Ohmes with Bank of America Merrill Lynch.

[Robert F. Ohmes:]

A couple of quick questions. I guess the first question is, it was obviously noticeable how strong the total revenue growth was versus the futures number, constant currency, put up last quarter. Any thoughts on that 15% global comp gain, sort of what drove it this quarter and why or why wouldn't that continue going forward? That was one question. And just a follow-up on China, can you give us a little more color on what the futures -- that minus 6 China futures? Is it Sportswear futures are down big in China but technical footwear is up or in technical apparel is up or flat? Or just sort of some color on if there's a pretty dramatic difference between sort of your Sportswear business in China in the outlook and whether you're actually growing the higher price point technical product.

[Charles D. Denson:]

Okay. Robbie, it's Charlie. Let me take the comp store number first. I think what you saw was an incredibly strong brand and some incredibly strong product coming out of the DTC numbers. A lot of that number was being driven out of the North American marketplace, the -- it's weighted where we saw a huge success in the North American marketplace and something that I think is indicative of our ability to continue to drive our -- both our brand and the business forward as we think about that. And with regard to the 6% number in China, it's really relatively balanced across both Footwear and apparel and Sportswear and performance. I would say that Sportswear numbers are a little bit -- I mean, the -- excuse me, the performance numbers are a little bit stronger. And I would also add that it's our goal right now to manage the supply into that marketplace. I mean, one of the things that we've always talked about is the strength of the brand in the marketplace and creating a pull market and making sure that our supply and demand ratios are intact. Right now, we have an overabundance of supply and we need to manage that as we continue to drive demand.

[Donald W. Blair:]

Yes, I wanted to -- Robbie, I just want to add one more thing. The other thing that's really powering our DTC business is really stronger operations. Those store operations are getting better and better. And Charlie referenced this earlier in terms of our learning that we can deploy back into the wholesale business as well. But our DTC operations are becoming more and more productive on a door basis, and that's also helping fuel the comps.

[Robert F. Ohmes:]

And just one last follow-up. Charlie, on the China futures number, it's down 6%, not -- obviously not a number that we all like seeing. But the local Chinese brands are putting up much worse numbers than that and look to be under much greater pressure in the Chinese market than your brand is. Can you give us a sense on what the kind of market share opportunity is for you? Some -- a lot of the partners you work with also work with these Chinese brands that are really getting killed over there. Can you just give us a sense on how you think that could play to your advantage?

[Charles D. Denson:]

Yes, well, I think, I mean, you're right, Robbie. I mean, you bring that up. I think the competitive landscape right now for us on the long term -- actually, we're pretty -- we feel good about because to your point, a lot of the local brands have really struggled and have continued to show an inability to figure out how to go forward. I think that offers up longer term some great market share opportunity for us. In the near term though, it really -- with the discounted products from all the brands in the marketplace, it tends to throw some of the market share numbers off a little bit depending on who's discounting the heaviest and who's moving, trying to move the most inventory. But that being said, I do see a consolidation in that marketplace. We've seen it time and time again around the world as markets develop, and I think you're going to see some of that in China as well. But we still believe that, that market has a ton of growth left in it. And I don't want to let that get away from any of these conversations, that it's still a very, very big growth opportunity for the NIKE Brand.

[Mark G. Parker:]

This is Mark. I'm going to jump in here. The strength of the category offense that you're seeing more in full bloom here in North America, it really represents the huge opportunity in China over the long term. So we have the strongest offering of product across the categories, across product types than we've ever had as a company in large part due to the focus we've had by category. And as we leverage that position more effectively in China, I think you're going to see that competitive advantage of NIKE actually extend itself.

[Operator:]

Your next question comes from the line of Sam Poser with Sterne Agee.

[Sam Poser:]

Just a couple of questions. What happened -- what do you think you might have misread in China as to sort of the speed of change? And how do you view the customer there or the consumer there differently then in their development cycle than you saw maybe in Western Europe or other markets that you've developed and over time?

[Charles D. Denson:]

Yes, I think, I mean -- I think the biggest thing that we've alluded to is just the pace at which the change occurred. It's like I said. I think we've said it in the prepared remarks as well in a sense that we have been talking about this for probably the last 6 months, 6 to 12 months. I think the pace from which it has accelerated, I would say, maybe caught us a little off guard. That being said, I really feel good about the direction that we're headed. I think back to what Mark just talked about, our ability to differentiate our distribution network and create differentiation in the marketplace, which ultimately creates capacity. I think 2 -- or 1 of the other things that we certainly didn't see coming was the slowdown economically and what the impact that might be having. We don't look at that as an excuse. And we, in a lot of ways, look at that as an opportunity because I think it does shake out the marketplace. And I think you're going to see some consolidation. And I think that benefits us.

[Sam Poser:]

And then secondly, just a follow-up on that. I believe much of the question was answered before. Do you see -- how much of a divergence do you see between the -- like the acceptance of NIKE Footwear in China versus apparel? I mean, my impression in talking to a lot of people is that it's almost like almost 2 separate brands right now in that the Footwear has been extremely well accepted. It stands more apart from maybe more the other at least. The consumer doesn't maybe understand it apart from the other rather than the apparel. I wonder if you could just...

[Charles D. Denson:]

Yes. I think, I mean -- I think certainly, your points are probably fair. I mean, obviously, the brand, the Footwear product has the capacity to really be more. I mean, as much as we feel great about the innovations we've introduced on the performance side of Footwear, a lot of it are just pretty cool looking. And in China, it's certainly resonating with the consumer. And I think that's why we continue to have some pretty good success on the Footwear side. And I think the apparel side is a little bit different in a sense that, that consumer is not as developed or sophisticated as a consumer in the western marketplaces, like Western Europe or U.S. That being said, they're getting there very quickly, which again plays into why we feel so confident long term that we've got the right offense and that we're posed to continue to grow in the long term. I think once we get through a little bit of this inventory issue on the apparel side and continue to work through the retail productivity opportunities, we're going to be in good shape.

[Mark G. Parker:]

I wouldn't over rev on the apparel piece too much here. A lot of the advancement we're going to be making in apparel, I believe, is executing the fundamentals better. Charlie mentioned getting the fit more tailored to the Chinese consumer. We're doing that. And some of the early sell-throughs we're seeing there are actually quite impressive, and then actually just making a more directed assortment for our retail partners as well. So we see an opportunity there, just basically executing the fundamentals of the apparel business even better and then helping our retailers become more productive in that segment.

[Operator:]

Your next question comes from the line of Omar Saad with ISI Group.

[Omar Saad:]

I wanted to follow up on the pricing question. The price increases that you've been putting through so far, have you been seeing any resistance at the consumer level, at the retail level? And if so, is that why, Don, you talked about being a little bit more differentiated in price increases, longer term, and certain styles and SKUs will see price increases and others won't?

[Charles D. Denson:]

Yes, I would say we have seen very little. There has been maybe a couple of styles. But overall, we're very happy with -- I mean, as you can see, the revenue numbers continue to go well. The unit numbers continue to climb. And so we're seeing some very strong brand strength and performance in sell-through at retail. And I think -- obviously, I think most everybody is doing their store checks and checking our sell-through rate. Certainly, here in the U.S., we have seen very little resistance to the price. So we are still very confident. And then I'll just go back to what Don talked a little bit earlier. It's just continuing to look at this opportunity case by case, from geography to geography, from category to category and really continuing to sharpen our ability to take price where we feel we have the opportunity and not to where we're taking advantage or we're going to get hurt on the revenue line.

[Mark G. Parker:]

And that's exactly what I would emphasize. This is about maximizing the profitability and the value creation, Omar. It's not about believing that we don't have the strength in the brand and the product to take the price.

[Omar Saad:]

And if you guys see we're in -- feel we're in maybe a long-term structurally, more inflationary environment, rising wages? Do you see an opportunity to maybe take -- continue to take price over time, maybe even take price in excess of the inflationary increases given the innovation that you're putting out there?

[Mark G. Parker:]

Yes. We're certainly looking at those opportunities, and I think you hit it. The innovation that we have coming in the pipeline, I think, is going to demand some premium pricing. We're very happy, as Charlie said, with the leverage that we've created, with the price increases that we've had. And I'm bullish knowing what's coming in the pipeline to see that we have more of those opportunities in front of us.

[Omar Saad:]

And any quick update on Flyknit and its first kind of initial rollout, how you feel about how that's going, especially in light of -- I think you've taken some legal action recently to keep proprietary and protect some of the proprietary properties [ph] around that?

[Mark G. Parker:]

Yes. Well, first of all, I'm very bullish on Flyknit, as I've been publicly stating since the very beginning there. From a performance standpoint, obviously, from a sustainability standpoint, incredible innovation that has the potential to really significantly, over time, decrease our product cost while we increase the performance. And we can do some things from a performance standpoint that are extraordinary. I mean, what we're seeing in the first stages of Flyknit is just sort of the tip of the iceberg. Some of the successive generations that we're already working on are incredibly impressive. And I say that not only as the CEO but as a shoe dog. Yes, I'm not surprised that we've got some imitation going on in the marketplace or attempted innovation. We expect to see that, but we'll defend our position certainly. It's very important to us.

[Operator:]

Your final question will come from the line of Michael Binetti with UBS.

[Michael Binetti:]

So I think, Don, in the past, you've shared with us some visibility on the front-half and back-half of the futures window. Would you be -- could you help us out with understanding what the front-half and back-half looks like in the China futures window?

[Donald W. Blair:]

I can't do it on a geography basis. I don't have that to hand, but what I will tell you on an aggregate basis, the constant-dollar futures are balanced. But from a currency standpoint, the currency comparisons are tougher in the first half of the window. So it's slightly backloaded on a reported basis but balanced on a constant-dollar basis.

[Michael Binetti:]

Okay. Then maybe you could tell us how the global futures number then splits up between ASP and units?

[Donald W. Blair:]

Yes, that was in the prepared remarks. It's 5 on units and 3 on ASP.

[Michael Binetti:]

Okay. And then can you -- I know in the 10-Q, you guys released your inventories by region. Would you be willing to share your China inventories at quarter end and then perhaps -- a big gray area in the past has been visibility into inventories out in the channel in China. Maybe you could tell us a little bit about how good you feel like your visibility is there today and how you're gauging the health of the inventory out there right now, maybe what inning we're in of clearing those inventories that aren't exactly on your -- on the corporate P&L.

[Donald W. Blair:]

Well, first of all, the inventory information will be in the SEC filings. So I'd rather leave it to that in terms of providing that information. I think, as Charlie said, one of the things that is creating the speed with which the situation is developing is that we are managing it assertively. We do have good visibility into the channel. It's not perfect. But in China, we have pretty good visibility into the channel and when we see it building up, we're going to take action on that. And that's one of the reasons why were going to be managing our futures. So I'd say we're -- it's going to take us some time to work our way through this, but we have reasonable visibility and we're going to take the actions we need to, to clear out the market -- clear out the channel.

[Kelley Hall:]

All right. Well, thank you, everybody, and we'll talk to you next quarter.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you all for joining, and you may now disconnect.