NKE
#Thanks, <UNK> and <UNK>, and hello to everyone on the call
We are pleased with the results that we delivered in Q3, and, at the same time, we are not satisfied
We are pleased, because we continue to strengthen the fundamental drivers of NIKE’s long-term revenue growth and earnings potential
Our financial strategy has three pillars; delivering strong revenue growth; expanding profitability, and generating high returns on invested capital
In Q3, we delivered revenue growth in line with the guidance that we communicated 90-days ago
We drove strong double-digit currency-neutral growth in aggregate across our international markets, which now represent more than half of our global portfolio, and we re-positioned NIKE for sustainable, profitable growth in North America long-term
We also expanded profitability, well in excess of our guidance, with EPS growing 24%
Finally, we delivered return on invested capital of over 33%, and at the high end of our targeted range, by continuing to edit within our core spending, to amplify more focused strategic investment in areas such as product innovation, digital commerce and membership, while also more tightly managing inventory
Over the past several years, NIKE has become even more fit for growth
On a currency neutral basis, we have built a more efficient and profitable business model
We have sustained momentum in the drivers of full-price gross margin expansion
We have systematically reduced SG&A as a percent of revenue
And we have significantly expanded our currency neutral EBIT return on sales
But, we are not satisfied
We are clear-eyed with respect to the challenges we have faced and opportunities we have not fully capitalized upon in the short-term
We have and we will continue to attack those opportunities with urgency
We are also obsessing over the triple-double that <UNK> referenced: doubling the cadence and impact of innovation, doubling our speed to market, and doubling NIKE’s direct connection to consumers in the marketplace
That is the formula we are employing to fuel NIKE’s next horizon of accelerating growth
As for innovation, we have more than doubled our investment in innovation of late, and you will now see us double the flow and impact of innovation we bring to market, immediately beginning in Q4. We also see tremendous growth potential in doubling our direct connection to consumers
NIKE’s Direct to Consumer business continues to grow much faster than the broader market, and NIKE-branded concepts operated with our strategic partners continue to grow faster than undifferentiated multi-brand stores
In short, NIKE always wins when we create a home field advantage, that brings together a curated assortment of our products, a NIKE-branded environment, and direct, personal service of the consumers
To be clear, this opportunity is not simply about branded space
It goes well beyond
We see the opportunity to leverage NIKE digital membership to elevate personal service broadly across the marketplace
And, today, NIKE digital members already spend nearly two times what other NIKE consumers spend per transaction
Identifying, and then aggressively seizing upon these compelling growth opportunities is what we mean when we say NIKE is on the offense, always
But, before I speak to our go-forward outlook in more detail, let’s take a few moments to reflect on the results that we delivered in Q3. In Q3, NIKE, Inc
revenue increased 5%
On a currency neutral basis, revenue grew 7%, led by continued double-digit growth in Greater China, Western Europe and the emerging markets
Third quarter diluted EPS of $0.68 increased 24% versus the prior year, driven by revenue growth, SG&A leverage, higher other income, a lower tax rate, and a lower average share count
Gross margin contracted 140 basis points in the quarter
Full-priced average selling prices continued to expand
However, margin contracted overall, due to higher product costs, FX headwinds, and off-price sales
Demand creation decreased 7% to $750 million for the quarter, as our fiscal year spending was front-loaded, due to significant investment around the Olympics and European Football Championships
Operating overhead decreased 1%, as our continued strategic investments are being funded by productivity gains within our core operational spending
The effective tax rate for Q3 was 13.8%, compared to 16.3% for the same period last year, primarily due to a reduction in tax reserves and an increase in the mix of earnings from operations outside of the U.S
, which are generally subject to a lower tax rate
As of February 28th, inventories were up 7%, driven by a higher average cost, due primarily to product mix and to support growth of our DTC businesses
Wholesale inventory units were down 3%
Next, let’s turn to a few of our key operating segments
North America revenue grew 3% on both a reported and constant-currency basis, as we continued to see balanced growth across both footwear and apparel, highlighted by another quarter of strong growth in NIKE Sportswear and the Jordan Brand
EBIT growth of 9% outpaced revenue growth as gross margin expansion and SG&A leverage delivered increased profitability
As <UNK> detailed, we continue to make great progress in North America, rebalancing supply and demand, reigniting momentum in our Basketball business, and sustaining momentum in Sportswear
That said, the North America retail landscape is not in a steady-state
Digital disruption and other dynamics are resulting in more aggressive promotional activity than we expected 90-days ago
So we are going to remain tight, with respect to the supply that we are putting into the North America market in the short-term, while aggressively driving the initiatives that will reshape and grow the market, and extend NIKE’s leadership long-term
Now, turning to our international markets, where we continue to have very strong momentum
First, in Western Europe, revenue increased 10% on a currency neutral basis, as we delivered another quarter of strong multi-dimensional growth led by our Sportswear, Running and Global Football categories
On a reported basis, revenue increased 4%, while EBIT declined 13%, reflecting the impact of transactional FX headwinds and higher product costs on gross margin, partially offset by SG&A leverage
In our emerging markets, revenue grew 13% on a currency neutral basis, led by our Sportswear and Running categories
We also saw double-digit growth across most territories
On a reported basis, revenue increased 8%, while EBIT decreased 4% as results continue to be heavily impacted by FX
Last, but certainly not least, Greater China delivered another quarter of extraordinary results with currency neutral revenue growing 15%
We continue to see strong momentum across the business, with double-digit growth in wholesale and DTC, footwear and apparel, and nearly all categories
China as a nation is accelerating towards sport, both in terms of participation and passion, and urbanization continues at full-speed
With over 350 million Chinese millennials, one of the largest and most important demographics in the world, we believe we’ve just scratched the surface of our growth potential in this important market
On a reported basis, revenue grew 9% and EBIT expanded 6% due to strong revenue growth and SG&A leverage
As evidenced in Q3, we extended our longstanding track record of managing all of the levers within our global portfolio to deliver strong results in the near-term, even amidst volatility
As we look ahead, we will also continue investing and innovating to exceed consumer expectations and fuel long-term sustainable, profitable, capital efficient growth
As for our specific guidance, in Q4, we expect reported revenue to grow in the mid-single-digit range, slightly below our Q3 reported rate of growth
On a currency neutral basis, we expect growth in the high single-digit range
We continue to see very strong growth in our international geographies, ranging from Greater China to Europe to emerging markets
In North America, we have made great progress over the course of this fiscal year, solidifying the fundamental drivers of growth
We are by far the leading and largest brand in North America with a $15 billion growing portfolio
Based upon the breadth and depth of our portfolio, we anticipate that the currently dynamic overall retail marketplace will create both puts and takes in the short-term
So we are being appropriately measured with respect to our Q4 financial targets for North America
We will keep supply tight, maintaining the strong foundation we’ve created, while we bring new innovation to market and accelerate more direct consumer connections
Shifting to gross margin, 90-days ago, we anticipated less Q4 gross margin contraction versus prior year than we have seen year-to-date
While we were anticipating greater FX headwinds in Q4, we were also expecting to partially offset that with significant expansion in our operational, or currency neutral gross margin versus prior year
Today, we expect the same FX impact that we anticipated 90-days ago
However, based upon the currently more promotional environment in the overall North America marketplace, we do not believe it is prudent to target as much short-term expansion in our operational gross margin
Instead, we are going to maintain the financial flexibility to ensure that we continue to optimize sell-through
Accordingly, we are now targeting 150 to 175 basis points of gross margin contraction in Q4 versus prior year, with the year-over-year variance largely driven by FX
As for Q4 SG&A, we expect it to be roughly flat versus the prior year, as we continue to systematically drive productivity gains through our Edit-to-Amplify initiative
Other income, net of interest expense is expected to be approximately $15 million in Q4; and, we expect our Q4 effective tax rate to be approximately 22%
Note that NIKE Brand futures orders are down 4% on a reported basis versus prior year, and down 1% on a currency-neutral basis
As previously discussed, futures are an important part of our operating model, but futures growth is no longer a reliable proxy for revenue growth based upon several factors we’ve previously articulated
Illustrating this point, you will see that China futures are growing low single-digits based on changes we have made to our monthly shipment flow globally
However, we continue to project strong double-digit revenue growth in China
We are in the early stages of our planning for fiscal year 2018, and will provide financial guidance on our next earnings call
Today, I'll share some preliminary thoughts
We are employing a balanced, three-pronged approach to our planning for fiscal year 2018. First, we will remain appropriately measured
Second, we will be sharply focused, attacking the most compelling growth opportunities in the marketplace with speed and agility
And, third, we will be on the offense, executing the triple-double that will fuel NIKE’s next horizon of accelerating long-term growth
Financially, we are targeting continued revenue growth across all geographies in fiscal year 2018, led by strong growth internationally
We also project significant operating leverage and expanding profitability, which on a currency neutral basis would result in earnings growth consistent with our long-term financial model
That said, at our investor day in October fiscal year 2016, we communicated that we expected FX to be a significant headwind through fiscal year 2018, as our long-dated hedge portfolio matures and rolls forward
And since that time, the U.S
dollar has further strengthened against most international currencies
At current rates, we project that we will have absorbed $1.6 billion to $2.0 billion of cumulative FX downside over fiscal year 2016, fiscal year 2017 and fiscal year 2018, with the most significant annual impact being in fiscal year 2018. We look forward to putting these extreme FX headwinds behind us, as we exit fiscal year 2018. In the meantime, we will continue to deliver strong revenue growth, and make NIKE a much more efficient and profitable enterprise on a currency neutral basis
In closing, we will continue to manage all of the operating levers within our portfolio to deliver strong performance in the short-term
At the same time, we will remain relentlessly on the offense, investing, innovating and, in some cases, revolutionizing the industry to exceed consumer expectations, fuel long-term growth and create value for shareholders
With that, we’ll now open it up for questions
Question-and-Answer Session
And <UNK>, I’ll take the China question
The short answer is, the China futures in a low-single-digit range reflects purely timing impacts
As we continue to optimize our management of supply and demand and inventory, one of the opportunities we’ve identified is with the respect to the flow across the three months that comprise a season
And so we’ve made some changes that help us better identify opportunities and capitalize on being in stock in the marketplace
It also has a benefit to us from an inventory management and capital management perspective
We see continued strong double-digit growth in China
In no way do the futures reflect any change in our very bullish view with respect to the tremendous performance that we’ve had, and we continue to expect in China
Yes, well, these cushioning systems, all three of them, and in fact there’s four
If you listen carefully, there’s a fourth comfort cushioning system in the works
These have been in development for the past two or three, in some cases, four or five years
This is part of our double the investment in R&D, and we’re really seeing that investment paying off
One of the most important outputs of performance innovation for NIKE is in the area of cushioning
So we see – some of this work actually led up to Rio
The top three finishers in the marathon were all wearing the Zoom X technology, and also in the Olympic trials leading up to the Olympics
So you’ve seeing bits and pieces of some of this but not out in the market at scale
So we’re basically ready to launch the product, excited about every one of the cushioning systems
They not only create a new level of performance and incredible breakthroughs in the case of the Zoom X, but they also create a whole new aesthetic, which is translatable not only into performance product, but also to the street
So the leveragability and the scalability of these technologies is tremendous
The challenge we have frankly is to make sure that we’re – the focus is on these and we scale these in a way that we can really tell the stories independently
But together, they form what is truly – and I mentioned it, a cushioning revolution for NIKE and the industry
As a product geek, I am incredibly excited about what’s coming in the next six months
I’ll just add couple of other things
I would just say that what we see from the marketplace is consumers want both great performance, and they want style, and they want those two things together
And I think a great example of that is the product that we’re actually just launching, which is the Air VaporMax, which you’ll see that there are actually different variations to that product; one which is a very clear high performance product, the running shoe and we’ve also got a laceless version, which actually appeals to more of a style perspective
But the shoe in and of itself is both great performance and it’s also superiorly stylish
And so that is what we believe the consumer wants
So when we bring new platforms, you will see us bring more variations, that gives the consumers more choice on the thing that they actually love all the time
Go ahead
It’s a great question <UNK>
To be clear our top priority is investing to fuel long-term growth
So that’s where the dialogue with respect to SG&A or capital expenditure starts at NIKE
But we’ve identified is in over time, our growth has allowed us to invest appropriately, and in some cases in a very ample, maybe even a little more than we necessarily needed to
And I would think about this way
We have existing and new truly differentiating capabilities or competitive advantages in NIKE
Those include things like product innovation, design, digital, brand marketing, including sports marketing and our supply chain, especially the elements of the supply chain that <UNK> spoke too, the ones that we're looking to get greater speed out of, in service to the consumer
That’s where our focus is on investment
The other functions that we have within the Company are certainly important, but they’re not differentiate capabilities for NIKE and we look at those other functions as functions where we can optimize our spending, not just for purposes of saving expense, but it actually makes us more streamlined and nimble as an organization
So in some cases, our editing is aligned with shifting business priorities, or with existing business priorities, and in other cases our editing is really a form of zero basing in areas where we believe, we have the opportunity
And that’s what I would call from the financial perspective, my version of <UNK>'s Edit-to-Amplify initiative from a product and business perspective
And we believe that we continue to have opportunity in this regard
Again, if you exclude FX, we've made ourselves much more efficient and profitable over the last couple of years
And we still see opportunity ahead in that regard
Hi, <UNK>
It’s <UNK>
I’ll start on that one
The first part of your question was about what we’ve been talking about over the last several quarters, and we have made great progress in that regard
You obviously saw revenue growth and margin expansion in the quarter with inventories declining
That is pretty squarely in the zone of effective and efficient supply and demand management
So we have re-solidified our foundation in that regard
As <UNK> and I think <UNK> to some extent touched upon, we’ve also solidified the fundamental drivers of growth in North America
<UNK> talked about all of the work we’ve done to reignite momentum in Basketball
We have continued momentum in Sportswear
So what we’re referring to when we talk about being measured in the short term in Q4 is the recognition and reality that it’s a promotional marketplace, particularly in North America is, in light of some of the digital disruption that’s going on
I think <UNK> earlier referred to there, select channels that are more challenged than others
What we’re most excited about is there are dimensions of the market that are tremendous opportunities
And so as we move into fiscal year 2018, what we’re really focused on is creating a springboard for accelerated growth in North America, again, through the triple double
And in the marketplace, obviously, one of those ---+ the three doubles is doubling our direct connection to consumers through DTC and our wholesale strategic partners
Frankly, we’re probably more bullish than ever on the long-term growth projection in North America
And why I say that is it’s becoming even more crystal clear to us that the strategies we’ve been employing to elevate the experience, the personal service of consumers in the market, digital, we’ve been leading the NIKE
com but also membership, we’re seeing much stronger growth in the dimensions of the market where NIKE is connecting with consumers
Of course, we connect with consumers in our Direct-to-Consumer business
We do it through concepts like House of Hoops, with Foot Locker
And as we said, in each of those dimensions, and when you get down to purely digital membership, we’re just seeing the growth outpace or the sales per transaction outpace
And so we see our way to incredibly strong growth in North America long term
There will be puts and takes in the short term
Clearly with innovation and disruption, comes both puts and takes
I think by analogy, you might look to greater China
Greater China is a market with extraordinary growth, by really focusing on aligning product, a NIKE-branded environment, both owned and through partners and digital to fuel sustainable sustained growth
So as you probably know <UNK>, and for others, we can't eliminate the impact of foreign exchange
And as you know, over two years ago, we saw significant strengthening of the dollar pretty dramatically and quickly against a lot of international currencies, particularly the euro
And we've seen a lot of volatility over the last couple of years
But largely dollar strengthening
Our hedging strategy is largely using longer dated
So 12 to 24 months out forward hedging to mitigate and delay that impact
So when I spoke to the $1.6 billion to $2 billion of impact over two years, on a rate basis you see those moves happened in the foreign currency impacts immediately
Our hedging strategy essentially steps us down or frankly in the opposite would steps us out, but steps us down to that impact
The largest single annual impact will be in fiscal year 2018. That said, it hasn't been insignificant in fiscal year 2016 or 2017, it is actually ---+ the FX impact has been a double-digit negative headwind on EPS growth
So while we continue to deliver strong EPS growth, what we're actually most proud of is that excluding foreign currency, that would be double-digit higher in terms of our growth
So that hopefully gives you a little bit more dimension, but we're not providing a specific forecast as to the impact of FX on fiscal year 2018 today
Absolutely
And we have certainly done that over fiscal year 2016 and 2017. First and foremost is growth
We are obviously a growth company and in fact with attacking compelling growth opportunities in the market
Long-term obviously is our focus but in the short term as well
I'd say from a margin perspective, the underlying drivers of gross margin expansion are very strong and we see those being very strong in fiscal year 2018 versus fiscal year 2017, again on a currency neutral basis
I mentioned that we continue to see opportunity to become even more fit for growth from an SG&A perspective through Editing to Amplify
And what I would say is most importantly for us in the short term is how we're executing against our long-term strategy
And that's what we’re going to be most focused on as we finalize our plans for 2018 and as we move through 2018, as executing against Triple Double that <UNK> referenced
