Nike's CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Seeking Alpha

Nike, Inc (NKE)

F4Q 2013 Earnings Call

June 27, 2013, 5:00 pm ET

Executives

Kelley Hall - Vice President, Treasury and Investor Relations

Mark Parker - President, Chief Executive Officer, Director

Charlie Denson - President, Nike Brand

Don Blair - Executive Vice President, Chief Financial Officer

Analysts

Bob Drbul - Barclays

Robby Ohmes - Bank of America/Merrill Lynch

Kate McShane - Citi

Omar Saad - ISI Group

Christopher Svezia - Susquehanna Financial

Lindsay Drucker Mann - Goldman Sachs

Presentation

Operator

Good afternoon, everyone, and welcome to Nike's fiscal 2013 fourth quarter conference call. For those who need to reference today's press release, you will find it at http://investors.nikeinc.com. Leading today's call is Kelley Hall, Vice President, Treasury and Investors Relations.

Before I turn the call over to Ms. Hall, let me remind you that participants on this call will make forward-looking statements based on current expectations and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in the reports filed within the SEC, including Forms 8-K, 10-K, and 10-Q.

Some forward-looking statements concern future orders that are not necessarily indicative of changes in total revenues for subsequent periods due to the mix of futures and at-once orders, exchange rate fluctuations, order cancellations, discounts and returns, which may vary significantly from quarter-to-quarter. In addition, it is important to remember a significant portion of Nike, Inc.'s continuing operations, including equipment, Nike Golf, Converse, and Hurley are not included in these futures numbers.

Finally, participants may discuss non-GAAP financial measures, including references to wholesale equivalent sales. References to total wholesale equivalent sales are only intended to provide context as to the overall current market footprints of the brands owned by Nike, Inc. and should not be relied upon as the financial measure of actual results.

Participants may also reference other non-public financial and statistical information and non-GAAP financial measures. Discussion of non-public financial and statistical information and presentations of comparable GAAP measures and quantitative reconciliations can be found at Nike's website, http://investors.nikeinc.com.

I would now like to turn the call over to Kelley Hall, Vice President, Treasury and Investor Relations.

Kelley Hall

Thank you, operator. Hello everyone and thank you for joining us today to discuss Nike's fourth quarter and fiscal year '13 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 prepare remarks, we will take your questions. We would like to allow as many of you to ask questions as possible in our allotted time. So, we would appreciate you limiting your initial questions to two. In the event you have additional questions that are not covered by others, please feel free to re-queue and we will do our best to come back to you. Thank you for your help with this.

I would now like to turn the call over to Nike, Inc. President and CEO, Mark Parker.

Mark Parker

Thanks, Kelley. As you know, last week we announced strategic management changes for our organization. Chief among them is the decision by Charlie Denson to move on from his role with Nike. Yes, he leaves some huge shoes to fill but luckily that's the business we are in, filling shoes. More on that in a minute.

First, a bit of context on our leadership team going forward. I won't go through all the names here, but many of them are people you already know. Even more important, they know Nike, and they know each other. They bring tremendous passion, energy and chemistry to our future, and some people will be providing leverage and continuity from their existing positions while others will be assuming new roles.

These changes reflect our successes and our biggest opportunities and they represent five very specific and ongoing commitments. Number one, to accelerate our innovation agenda. Two, to elevate design. Three, optimize our category and go-to-market strategies. Four, to integrate product creation and merchandising to create greater continuity from design all the way through the retail, and five to sharpen our focus on supply chain and manufacturing improvements.

We spend a lot of time developing our leadership talent and that's something that never stops. It allows us to adapt and evolve our competitive offence and that's what you can expect as this team takes Nike into the future.

Now, the fiscal year 2013, which was an important year for Nike and our industry. New innovations in technologies continue to accelerate the pace of change in the industry and our business, and we are focused on leading on changes. In fiscal year '13, that created greater differentiation and separation for Nike, and that's key to expanding our leadership position.

In fiscal '13, Nike, Inc, revenues grew 8% to over $25 billion. It's interesting, it took us 18 years to get to our first $2 billion in revenue and we added about that much in just the last 12 months.

Gross margins were up slightly for the year in a challenging macroeconomic environment. And earnings per share grew 11% to $2.69. So, how do we do that? While we delivered a relentless flow of innovation consumers across categories that generated tremendous commercial success and we have a pipeline full and staged for the future.

We leveraged and drew inspiration from the never-ending energy of sports around the world. The Olympics, the Euro Champs, the DCs and Superbowl, March Madness and the NBA Playoffs. These are among the moments that inspire Nike to create and display our best work and we connect with the best athletes and teams to do that.

We also collaborated with retail partners to expand capacity in the marketplace and our own DTC business is hitting on all cylinders that's in-line factory stores and online. Those two things together are driving the marketplace transformation we talk so much about. In short, our brand, our products and our distribution have never been stronger.

We also continue to get better and better at financial management and operational discipline, which helps us leverage our portfolio to deliver strong results for Nike, Inc, in total. Our balance sheet is in great shape and we are well positioned to capture more growth in developed and developing markets and deliver more value to shareholders today and over the long-term.

I talk a lot about the power of our portfolio, and it starts with the focused group of powerful brands that have deep connections with consumers. In fiscal '13, revenue for our continuing other businesses, and that means Converse, Nike Golf and Hurley, grew 9% to $2.5 billion, while EBIT grew at twice the rate of revenue.

At Converse, fiscal year '13 was paced by a strong growth in key international markets with revenues up double digits in the recently converted markets of China and the U.K. Franchise product like Chuck Taylor delivered record sales again. And the brand's strong positions, style and music continues to connect with young consumers around the world. This helped Converse deliver $1.4 billion in reported revenue for the year.

Nike Golf also delivered a strong year with revenues up 9% to nearly $800 million, powered by the launch of innovative products like the Covert Clubs, Lunar Control in footwear and the new TW '13 shoe. Revenues at Hurley grew 5%, actually outpacing the action sports industry.

In fiscal '13, we also divested Cole Haan and Umbro. It was the right decision enabling us to focus our capital and our leadership talent on our highest potential growth opportunities. Of course the most powerful part of our portfolio is the Nike brand where revenues grew 9% to a record $23 billion for the year.

The two big market stories continue to be China and North America. But China first, where we continue to drive our strategy to reposition this market for sustainable and profitable growth. As we have said, the reset required discipline and patience. The race from China is a marathon. Its not a sprint. We are set up for the long run.

We own a premium brand position and we partner with the most inspiring athletes. We are the leader in performance innovation and we are making progress reducing inventory levels at retail and taking steps to increase the productivity of retail sales. Our path forward in China is clear. Let's create a pull market fueled by innovative products, compelling and productive retail and strong brand connections with consumers. That's the core of our success around the world and it is setting us up for the next wave of growth in China.

In North America, revenue in fiscal '13 exceeded $10 billion as we added $1.5 billion of new revenue in this geography alone. That growth was broad based across all product types in our wholesale and DTC business and across nearly all key Nike brand categories. It was an extraordinarily profitable growth as EBIT for the geography grew 25% to $2.5 billion. Our performance in North America shows the real power of our category offense and our strategy of innovative products, strong brand connections and premium distribution is equally powerful and relevant around the world.

We had many global competitive advantages but the most important one is innovation. It inspires us and it distinguishes us as a company. Innovation drives everything at Nike. It gives us new technologies and materials, helps us create iconic products and services that people want and the game changers they can't even imagine.

Innovation athletes and consumers. It shatters the traditional methods of manufacturing and distribution and bridges the physical and digital worlds of sport. Innovation makes Nike more competitive, more sustainable and profitable.

I believe there is more opportunity in the world and more capability inside Nike than ever before and that's why we are accelerating our innovation agenda. I call it innovation squared where we can deliver more new ideas and solutions faster than ever before. We are leveraging those across our sport categories, geographies and brands. Amazing things are in the market right now from Nike and even more in the pipeline. Though as we look into fiscal '14, you can certainly expect us to train more and compete harder than anybody else. We are athletes and that's what we do.

We are set to grow to explore, refine and leverage our leadership position. We have scale, power and passion and we are not shy about using them to support the athlete, and by the way, that means every athlete, to push ourselves and our partners to connect more deeply with consumers and to grow this company and deliver more value to shareholders.

Finally, on a more personal note, it's important to me to take a minute to thank two very special people. That's Charlie Denson and Gary DeStefano who have decided to retire after more than 30 years with Nike. Gary played a key role in leading our sales organization around the world, led teams in Asia-Pacific and the U.S., and for six year as leader of our geography teams grow our brand and business around the world. Gary's impacts on Nike over the past 30 years had been significant and I thank him for all he's done.

I have worked closely with Charlie Denson during most of his 34 years with Nike, and as you know almost daily over the last 10 years, and I can tell you, you get to know somebody pretty well doing that. And what I know about Charlie is that he is a brilliant and [operable] man, easy to respect and easy to like, obsessed with sports and the athlete and he has incredible passion for the brand and that's all a great combination. Even more important, Charlie showed the next-generation what it takes and what it means to be a Nike leader, and we go into the future stronger and more focused, thanks in large part to the example Charlie set over the last three decades. Charlie is more than a colleague, He's a friend, a mentor and will always be part of the Nike family.

So, thanks everybody. And now, for the last time, here's Charlie to take you through the Nike brand.

Charlie Denson

Thanks, Mark. That was nice. That was greatly appreciated. Okay. Well, Q4 marked a strong finish to a record year for the Nike Brand. A lot of it has to do with the power of our category offence, but there are multiple dimensions in addition to category. We are able to push and pull levers across the business and around the world to capture growth. Today, I want to focus on two of the most powerful levers in our portfolio, geographies and key categories. In the end, it's all about choices.

Focusing on the biggest, most promising opportunities for the Nike brand and our choices helped deliver very good fiscal '13. On a constant dollar basis, the Nike brand revenue was up 8% for the quarter and 11% for the year. For fiscal year 2013, we grew in every geography except Greater China, and across all of our key categories. Nike brand DTC revenue increased 24% for the year. With online sales, up over 30%, and global futures grew 8%.

The MVP for the quarter and the year really had to be North America. Fiscal year '13 was our first $10 billion year for North America, $10.4 billion to be exact. That brings incremental revenue over the last three years to $3.7 billion. North America EBIT grew 25%. Their revenue grew 18% and their inventory grew only 13%. At Nike when profits grow faster than revenue and revenue grows faster than inventory, we call that the financial Triple Crown. And for fiscal 2013, most key categories grew at a double-digit rate as did footwear apparel and equipment. So, clearly, we are up to our game in products, distribution and how we connect with consumers.

North America DTC delivered a record year for factory stores, in-line stores and online. Revenue increased 20% to over $2.5 billion with double-digit comps in both, our in-line and factory concepts. E-commerce was up over 30%, and our work with our wholesale partners expanded the potential of the market and increased profitability, so a better year for North America. Our biggest and most penetrated market. It's the best example of what is possible and illustrates the potential we have around the world. That said, we take nothing for granted in North America or any market for that matter. That's why we are continually committed to innovative product, strong brand connections and premium distribution to continue to create short and long-term growth for the Nike brand.

Okay. Let's talk a little bit about China. Mark mentioned and has mentioned many times, discipline and patience. Those are crucial to our growth path going forward. Our job is to build strong consumer connections and to increase market capacity to fuel long-term growth. Delivering innovative product, creating differentiation in the marketplace and improving profitability and productivity at retail, are the keys to our long term success in the China marketplace.

Specifically on retail productivity, we are working with our partners to improve supply chain efficiency, accelerate product flow and elevate store merchandising. That improves the experience for consumers, increases store productivity and leads to profitable growth for the retailer and for Nike. We have seen the success of this work in our Nike DTC stores and those partner doors that have been refitted with more focus to performance and product stories.

We are also seeing very strong performance in our new category doors. We opened our first running store and basketball store in fiscal year '13 with strong initial results. Overall, comp growth at our own inline and factory stores is up double digits. We also have initial executions with our retail partners open as well. We are seeing some promising initial results. These are all signs that our strategy is working. So we will continue to go deeper with the consumer, expand our performance and leadership position and elevate and expand the retail experience for the consumer and our partners.

At the middle of all this is the strength of the Nike brand. As the brand leader in this market, we are able to bring an energy and presence nobody else can match. You are going to see that again this summer when LeBron, Kobe and Kevin Durant for Nike as well as Carmelo, Chris Paul, Blake Griffin and Russell Westbrook representing brand Jordan head back to China. If anything can match the excitement of Game 7, it's the reaction these guys get from the young Chinese athletes. We have the roadmap to growth. The progress we have made to date confirms that and we are committed to the long term solutions and potential in this amazing market.

Okay, real quick, what's in Europe. Delivering some good results, especially in the North. We are expanding our number one footwear position in the region led by running and we are gaining share in football across the continent. Inventories are in good shape with European units essentially flat to prior year.

In our Emerging Markets geography, revenue is up 16% on the year and knocking on the door $4 billion in revenue. We see this geography continuing to supply a strong growth story. One of the biggest contributing factors will be the energy coming out of Brazil with World Cup followed by the Rio Olympics.

So lets move over to the category side. Since I am handing out MVP awards, I have to give one to running. For the second year in a row, both running footwear and apparel grew in every single geography. That momentum continues as we head into fiscal year '14 with futures growing at a double digit rate. Running is a tremendous success story for Nike. Has been for more than 40 years.

We lead in running with innovative products like Nike Air, Lunar, Flyknit, Free and Dri-FIT fabrications. All game changers and examples of our commitment to the athlete. We build running on strong brand connections like the Nike Women Half Marathon in Washington DC which sold out in a matter of hours. Or through Nike Plus which now has over 18 million members. We build running on premium distribution through our own stores and online and partnerships like the Track Club with Finish Line and key running specialty distribution.

Our commitment to serving the runner generated 18% constant dollar growth in fiscal year '13 exceeding $4 billion in annual revenue. We have delivered 14 consecutive quarters of double digit growth, broad based growth from both men and women. Running is a big part of the momentum we are creating in the women's business which was very strong in Q4. We have a hybrid strategy in women's that combines running, training and sportswear. It's the cross category version of our Amplify Sport strategy and we have tremendous upside here especially in sportswear.

Then, there is basketball. I would say, a co-MVP. Another category of worldwide leadership. March madness, the NBA, the Olympics, LeBron, Kevin, Kobe, in leagues or on the playground. Wherever the game is played with passion Nike and brand Jordan are there. a quick example for Q4. We released the LeBron 10 MVP shoe for LeBron's fourth MVP in five years. It sold through immediately.

He is the youngest player ever to win it four times. By the way, rounding off the top five, MVP vote getters were Kevin Durant, Carmelo Anthony, Chris Paul and Kobe Bryant. A Nike Jordan sweep or maybe as Mars Blackmon once said, It's Gotta Be The Shoes!

Brand Jordan is selling 3X more today than when MJ was planned. That's the power of the brand at work. We are seeing even more upside as we continue to leverage our Amplify Sport model to increase revenue across both footwear and apparel around the world. This is truly becoming a global brand. As FY'13 revenues increased at a double digit pace in all of our Nike brand geographies. Nike basketball plus Jordan finished the year up 22% on a currency-neutral basis.

Okay. The last category, Global Football. We are the best football brand in the world, bar none. In boots, cleat technology, upper design, lightweight uniforms or protection from the ground up, we are the innovation leader in the world's biggest game. We get our insights from the best players and teams in the world.

Fifteen years ago, we launched the Mercurial boot, and it changed the game forever. Lighter, more versatile and more beautiful. We changed the game again in FY'13 with the new Mercurial and the amazing Hypervenom. We had Nike teams in five different countries working on this boot. Neymar from Brazil laced it up and scored three goals in three games. That's what happens when the best wear the best. But the real story isn't what we did in FY'13. It's what's coming for World Cup. It's absolutely incredible and that's all I am going to say about that for now.

Q4 in fiscal 2013 showed a lot of what Nike is capable of, but not all of it. Not by a long shot. Mark talked about doubling down on our innovation agenda, what he calls innovation squared. That will prove even more valuable as we head into FY'14 and beyond. We are looking at the Winter Olympics, the Super Bowl the World Cup in Brazil. It's moments like those on the world stage and the countless moments of athletes in every town and city in between that brings out our best. It is what fuels our passion and our potential.

Finally, a couple of thoughts on this retirement thing. People have asked me, why would I retire. Well, I guess the easiest way to answer that is because I can. But honestly, it's a good time to focus on a different path forward for me and my family and the timing is great for this type of transition. The brand is stronger than it's ever been, financially and strategically. The company is in good hands with Mark and the new leadership, incredibly talented and focused and really in line with where Nike is headed, We've done a good job building our bench for the long-term, so all is good here. It's also important for me to thank all of you that have been with us over the years for your interest and insights as we have grown this great company. 52 calls, almost as good as Joe DiMaggio, but that's a long time to listen to me talk.

And, finally, I want to thank Don, Kelley, the entire organization for their leadership and commitment to delivering our long-term goals of shareholder value. To, Mark, a great partner, a great leader and most importantly a great friend, and certainly to Phil for making it all possible. It's been a great ride and a ton of fun.

Here is Don.

Don Blair

Thanks, Charlie. You know I've followed Charlie on these conference calls for well over a decade and worked with him for nearly 14 years. As CFO of Nike, I could not have had a better partner. Charlie understands how all of the dimensions and aspects of our business fit together and he knows how to work the levers. And, while he claims he is not an expert on financial management, he has the most important skill of all. He knows how to create value for our shareholders and has done so year-after-year. That's a great legacy, but probably not the most important one. I think Charlie's greatest legacy will be the people he's developed and inspired over the years and I count myself among them.

Charlie, thank you for 14 years of partnership and the great team you will be leaving behind.

Here at Nike, we have a list of 11 guiding principles we call our maxims. The maxims define our approach to the business as we strive to reach Nike's full potential. I think there are three maxims that characterize our FY'13 performance and speak to our ability to create shareholder value into the future. The first is, Nike is a company. More specifically, Nike is a growth company made up of a broad portfolio of businesses. The diversity and flexibility of the Nike, Inc. portfolio helps us manage risk and allows us to leverage our strengths at scale, driving the kind of growth in revenues, earnings and cash flow we are announcing today.

The second maxim states, we are on the offense, always. This Maxim describes how we drive to create the future rather than simply respond to it. We know that succeeding today isn't enough. We need to continue to raise our game if we are to succeed in the future. That means, we must invest in deeper consumer connections, product and manufacturing innovation and premium retail experiences as well as the operational capabilities to support them.

Over the last three years, we have significantly ramped up our investments in these areas. As Mark often says, we believe our opportunities are unlimited, but we realize our resources are not. Therefore, we will continue to make disciplined investments, human and financial, in the highest potential growth opportunities, while continuously editing and redeploying resources from the less attractive ones. That's how we're able to invest in the future while delivering profitable growth in the near-term.

Today's final maxim is a personal favorite of mine, master the fundamentals. Nike is a global company doing business in an increasing complex and volatile environment. Yet we are consistently able to deliver results at the highest level. That's because our strategies are focused and effective, our leadership teams are deep and capable and our financial strength is unmatched in the industry.

Three maxims, taken together, highlight the focus and discipline that enabled us to deliver the fourth quarter and full year results I will share with you now.

For our continuing operations, full year revenue for Nike, Inc. reached $25.3 billion, up 8% as reported and up 11% on a currency-neutral basis. Fourth quarter revenue increased 7% on a reported basis and 9% currency neutral. On both a reported and currency-neutral basis, Nike brand futures orders advanced 8%, led by double digit growth in North America, Emerging Markets and Central & Eastern Europe.

Fourth quarter diluted EPS increased 27% to $0.76, bringing full year EPS to $2.69, up 11% versus the prior year. The Q4 increase was driven by revenue growth, gross margin

expansion and lower demand creation compared to higher event driven spending last year. We also benefited from a lower tax rate and share count in this year's Q4.

Gross margin for the fourth quarter increased 110 basis points and was up slightly for the full year. Our Q4 results reflect the benefits of higher selling prices and easing material costs, partially offset by the ongoing impact of labor cost inflation, higher discounts, particularly in China and FX headwinds primarily due to weaker developing market currencies. In addition, about 70 basis points of the Q4 improvement reflected unusual costs in last year's Q4 for digital R&D and a one-time customs assessment.

Gross margin for the quarter was better than we guided, largely due to a shift in supply chain investments from Q4 to Q1 FY'14, as well as stronger performance from our other businesses.

Q4 demand creation spend was 13% below last year's fourth quarter, which included heavy investments in the Euro Champs, Olympics and NFL launch.

Operating overhead grew 19% for the quarter due to expansion of our DTC business as well as continued investments to support innovation and growth initiatives, particularly digital.

The Q4 effective tax rate was 22.8%, better than we expected, due largely to a reduction in tax reserves related to foreign operations. Our full year tax rate was 24.7%, roughly in line with the prior year.

Year-end inventory grew 7%, below the rate of futures growth. Inventory on our books is in good shape overall, with the percentage of closeout inventory at historically low levels.

Our balance sheet continues to be very strong, with $6 billion of cash and short term investments on the books at year-end. FY'13 ROIC reached 23.8% and we delivered $2.4 billion of free cash flow, both significant increases versus FY'12 and driven by improvements in working capital productivity.

During the quarter, we raised $1 billion dollars in long term debt at very low interest rates, giving us the flexibility to finance our investments in the business while continuing to increase cash returns to shareholders.

Now let's take a look at our performance by segment, starting with North America. As Mark and Charlie both indicated, North America delivered an extraordinary year, as revenues reached $10.4 billion, up 18% versus FY'12. Q4 revenues increased 12%, driven by strong growth across every category led by basketball, men's training sportswear and running.

For the quarter, footwear revenue increased 8% while apparel and equipment each grew over 20%. Direct to consumer revenues grew 16% in Q4, as comp store sales increased 11%, marking the 14th consecutive quarter of double-digit comp growth for Nike-owned stores in North America.

Q4 EBIT for North America grew 29% due to robust revenue growth, gross margin expansion and SG&A leverage. In Western Europe, Q4 revenues were essentially flat on a currency-neutral basis in comparison to very strong sales in advance of the Euro Champs and Olympics last year. Lower revenues in Italy and Iberia, both down over 20% for the quarter were offset by double-digit growth in our AGS Territory. That's Austria, Germany and Switzerland, and nearly 40% growth in direct to consumer revenues.

On a category basis, running grew double-digits and our basketball business more than doubled. Growth in those two categories offset lower sales in our other key categories. On a reported basis, Q4 revenues for Western Europe declined 1%, while EBIT increased 2% driven by higher gross margin. Central and Eastern Europe continued to deliver strong results in Q4. Revenues increased 11% on a currency-neutral basis led by strong growth in Turkey and Russia. The geography reported double-digit revenue growth for every category except sportswear and action sports, which declined.

On a reported basis, Q4 revenues for CEE grew 9%, and EBIT increased 18%, primarily driven by lower demand creation spending in comparison to last year's event-driven investments.

In Greater China, currency-neutral revenue declined 1% in Q4, as double-digit growth in performance running and basket ball was offset by declines in other categories, primarily sports. On a reported basis, Q4 revenue in Greater China was flat while EBIT decreased 2%.

As we've discussed on previous calls, we are repositioning our business in China for sustainable profitable growth, and most critical step in returning this market to healthy growth is creating more compelling, productive and profitable retail marketplace.

As Charlie noted, we are seeing some encouraging signs for our largest retail partners, overall comp store sales are growing and inventories are declining. Nevertheless, we still have a lot of work to do. As we do that work, our reported results for China won't always follow a smooth trajectory and it's difficult to predict how quickly will return to sustained growth.

While China's futures' orders for the next six months are in line with last year, we expect revenues for the first half of the fiscal year will be below last year as we continue to manage the amount of product we ship into the market. At this point, we believe our revenue in China will stabilize around prior year levels in the second half of this fiscal year.

In Japan, Q4 revenues increased 4% on a currency-neutral basis as every key category except sportswear and action sports grew. On a reported basis, Q4 revenue for Japan decreased 11%, reflecting the impact of the weaker yen. EBIT declined 2% as the drop in revenue was partially offset by lower SG&A.

Our Emerging Markets geography delivered another remarkable year in FY'13 as revenues reached $3.7 billion, up 16% on a currency neutral basis. Q4 revenues also grew 16% on a currency-neutral basis driven by strong growth in Brazil, Argentina and Mexico. Among the key categories, running, football, women's training and action sports powered the growth. On a reported basis, Q4 revenue for the Emerging Markets grew 10% and EBIT increased 30% due to strong revenue growth, gross margin expansion and lower year-on-year demand creation spending.

Fourth quarter revenues for our other businesses increased 11% on a currency-neutral basis, driven by double-digit growth in Nike Golf and Hurley and 9% growth in Converse. On a reported basis, revenue grew 10% while EBIT increased 21%, driven by higher revenues and gross margins in each business.

Let me now turn to our expectations for FY'14. We expect revenue for the first quarter of FY'14 to grow at a mid to high-single digit rate. Full year revenue growth should be near the upper end of our high single-digit target range, with somewhat stronger growth in the second half of the fiscal year as we build towards the World Cup in Brazil.

Regarding the outlook for gross margin, we are encouraged by the progress we have made increasing our average selling price per unit by strengthening the premium segment of our footwear and apparel businesses and by taking selective price increases around the world. We have also ramped up our investment in manufacturing innovations that will increase the efficiency of existing production methods and over time create more revolutionary improvements in our sourcing base.

That said, we expect Q1 gross margin will be essentially flat with the prior year as continued labor cost inflation and unfavorable FX comparisons offset the benefits of easing raw material costs and higher selling prices. For the fiscal year, we expect gross margin expansion of about 25 basis points, with sequential improvement through the year as higher selling prices, lower discounts and easing FX headwinds should more than offset the impact of labor cost inflation.

For Q1 FY'14, we expect SG&A to grow at a low single-digit rate as we anniversary prior year investments in support of the Euro Champs, Olympics and NFL launch. For the balance of the year, we expect SG&A to grow at a low-teens rate in each quarter, as we continue to invest in our brands, DTC and innovation. The result would be low double-digit growth for the full year, slightly above the rate of revenue growth. For FY'14 we expect the effective tax rate will be about 25%.

Finally, we expect FY'14 EPS to grow at a low double-digit rate, essentially in line with the EPS growth we reported for FY'13. However, we expect first quarter EPS growth well above this rate, as demand creation spending declines in comparison to the heavy investments in last year's Q1.

Our FY'13 results reflect the power of the Nike, Inc. portfolio to deliver consistent growth in revenues, earnings and cash returns to shareholders while at the same time investing for long-term growth. We are confident we have the asset, capabilities and leadership to continue to do so for FY'14 and beyond.

We are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Drbul with Barclays. Your line is now open.

Bob Drbul - Barclays

Charlie, first of all, congratulations and best of luck and thanks for everything over the last 15 years.

Charlie Denson

Thank you. I appreciate it.

Bob Drbul - Barclays

I am a little busy here. Sorry. So I guess the first question I have for you, Charlie, just as this is your last call is, can you give us any, like Trevor taking over as President of Nike brand, any advice that you have given Trevor that you would share with us and what you should be most concerned about as he takes over at this point in his career?

Charlie Denson

Well, no, Trevor and the entire team are in great shape. Everybody knows Trevor. He has been around here a long time. He is great shape. He is well positioned to take the baton and keep going. I think there is no specific areas of advice that I can give him that I don't think he already knows. He is pretty well positioned and has got a great experience and he is a well recognized person, certainly around here and I think extremely as well. So I think I look forward to helping him make the transition and we will be in good shape.

Bob Drbul - Barclays

Okay and then, I guess as a bigger picture, and I don't know if this will be for Mark or for Don. Can you just talk about the outlook or the macro that has impacted the outlook over the last 90 days or last 60 days in the business and as you look at sort of the expectations on the earning side of it going forward? What have been the biggest factors to sort of alter the view a little bit here?

Mark Parker

Yes. I am glad you asked the question, Bob, because our perspective on the business really hasn't changed. We are absolutely as confident in the business as were 90 days ago. In fact, when we look at our constant currency operating profits, they have actually gone up a little bit in terms of our expectations, but a couple of things have happened. Number one is, the FX environments changed a bit and that's been a little bit of a drag on the numbers.

Secondly, we finished FY'13 with a few more shares than we had expected 90 days ago. Finally, if you look at our tax lines, our FY'14 perspective has not changed, but FY'13 came in a little better than what we had expected as we talked about in the prepared remarks. So, from an operating standpoint, we are just as confident as we have been and very confident going into FY'14. There's just been a few things that have pulled our growth rate down a touch.

Don Blair

I would jump in and add that our ability to sort of work the operational and financial levers to make the adjustments that we need to in light of some of the, or macroeconomic challenges. I mean that's never been better. We still feel like we have room for improvement in areas, but we have never had the ability to kind of surgically manage from an operational and financial standpoint as we do today. Very proud of that, and I think it's served us well, particularly over the last couple of years.

Operator

And your next question comes from Robby Ohmes with Bank of America/Merrill Lynch. Your line is now open.

Robby Ohmes - Bank of America/Merrill Lynch

Thanks. Hi, guys. And, Charlie, congratulations. Luck with what you do next.

Charlie Denson

I appreciate it. (Inaudible).

Robby Ohmes - Bank of America/Merrill Lynch

Two questions. The first question is the double-digit North American futures orders. You guys put up today another great number. Can you just give us some color on what channels might be driving that more than others as well as the average selling price component to that? Then if there's any changes in the categories driving that? Then the second question is just Brazil. Some of the unrest that's gone on there, I was just curious if you guys had any color or thought on that? Thanks.

Charlie Denson

When we talk about and we look at North America and both the results and the futures order going forward, they are still pretty broad based, running, continues to still grow at double-digits. Basketball is accelerating and you saw the Q4 basketball results. They were extremely strong. And certainly the NBA Playoff run didn't slow that down at all, and so we are very excited about that going into next year.

We talked about women's. We're pretty excited about the women's piece and then we are moving into our second year with the NFL here in North America, so it's really broad-based portfolio of progress I guess. When you look at the way that the business is being made up from a channel standpoint, we are doing it across all the channels. It's not one specific channel that stands out good or better than the others and I think that that speaks to North America management team and points of differentiation that we have been able to create in the marketplace.

Mark Parker

We talk a lot about complete offense and that means across the product platforms, technologies, categories, geos and wholesale and direct retail, and the U.S. or North America is a tremendous example of really operating a complete offense. And, the exciting thing is as we see that kind of success in the U.S. and kind of turn around all cylinders there, we see the opportunity to really take a lot of that and apply that to other parts of the world. So, leveraging that complete offense and those successes across the other geographies is really our plan. Very exciting.

The other point is as it relates to the organizational shift, Elliot Hill coming on board to lead the geographies. He is incredibly experienced. He has done a fantastic job in North America. Tremendous experience in both wholesale and retail. Great energy, lots of passion. Again, part of what I think is going to be a leadership team and has some tremendous chemistry. So, Elliot and his team, to Charlie's point, deserve a lot of credit.

Robby Ohmes - Bank of America Merrill Lynch

And just on the ASPs in Brazil?

Don Blair

So on the ASPs, Robby, we usually don't get into that level of granularity by geography. But across all the futures, as we talked about, we were up five points on units and three points on ASP and that trend line is pretty consistent. So, we don't usually get into that level of granularity on a geography basis. But all the geos are seeing similar trends.

Mark Parker

Your question on Brazil, obviously there is a lot going on in Brazil with the ramp up to World Cup and the Olympics. We know the unrest and we are watching that situation very closely to-date. There has been no material impact on our operations or our business in Brazil. We remain incredibly excited about the World Cup coming up and all the opportunities around that, and then following that the Olympics. This is, as we have said, our time to shine as a brand and we have some pretty amazing things coming, Charlie alluded to that, in the world of football. So, we are excited about the opportunity in Brazil. But we will stay close to it.

Operator

Your next question comes from Kate McShane with Citi. Your line is now open.

Kate McShane - Citi

Charlie, I would like to also add my congratulations and best wishes.

Charlie Denson

Thanks, Kate. I appreciate it.

Kate McShane - Citi

My question is around the supply chain. It was great to hear comments about the innovation in the supply chain and how it could possibly impact gross margins next year. I know it's still early days with Flyknit and other efficiencies that you are finding in the supply chain, but I wondered if you could update us on how this is ramping up as a production discipline.

Charlie Denson

Are you talking Flyknit specifically?

Kate McShane - Citi

Yes.

Charlie Denson

Yes, well, first of all, we continue to be incredibly bullish on Flyknit for a number of reasons that we have talked about before. Performance-wise, sustainability, margin, opportunities going forward, as we scale that technology within running, of course, and then across the other categories. So we are in the midst of a fairly major effort to scale Flyknit across other models.

Over this next 12 months you will see some very exciting new versions of Flyknit. I would say, just from a product standpoint, we are just scratching the surface in terms of the potential that it offers from a performance and an aesthetic standpoint. Let alone the manufacturing capabilities that it brings us.

The manufacturing payoff will come when, as we get this to even greater scale. We are well on our way, in terms of our plan, to leverage, like I said, Flyknit across categories and even across price points as well. So you will see some very exciting executions, actually starting as early as this August, you will see Flyknit actually meet Nike Free, and that's a great combination. I am tempted to say more, but I can't.

Kate McShane - Citi

Okay, great, and if I could just follow-up on that question, again with regards to supply chain and some of the labor costs that you are seeing. Obviously, labor has been a big pressure over the last couple of years. I know you have guided for it. But is there anything different that you are seeing or has anything gotten more accelerated in certain geographies where you are manufacturing currently?

Charlie Denson

Well, as far as acceleration, yes, we have definitely seen some fairly significant increases in wage rates in a couple of countries. I think the one in Indonesia certainly was pretty well publicized. We haven't seen the growth in quite that level in other places. But they have all been added up.

I think, as Mark talked about a little bit with respect to Flyknit, I think the longer term solution to addressing a lot of these labor cost issues is really engineering the labor out of the product and that really is with technologies and innovations like Flyknit and there are a number of others that we have in the pipeline that are aimed at the same thing. It will take some time, and that's why one of the reasons we spoke to this on the prepared remarks is that we are very carefully looking at all the other levers of gross margin, including price as well as just how we manage our mix.

One of the benefits we have seen in the last year or so is a real strength in the premium end of our business, which is the place where we have the most differentiation and the most opportunity for price. So, long-term, innovation we think is one of the ways to get at this labor cost pressure. On the near-term, we are also obviously looking at price and all the other levers in gross margin.

Operator

Your next question comes from Omar Saad with ISI Group. Your line is now open.

Omar Saad - ISI Group

Thanks. And, Charlie, let me add my congratulations as well. Great career and to Trevor as well as if he listening in. Can I ask you guys about ecommerce real quick? I know, there's lot of great brands out there that have become pretty high penetration in terms of the mix of the business, revenues generate online. I know you guys have been more focused on the digital side, creating ecosystems, communities as well as the commercial side of the business. How should we think about how and when the online platform can be ready to become a big contributor to the P&L as part of the DTC overall?

Mark Parker

Well, DTC and specifically online part of DTC is a huge priority at Nike, and we are investing in that platform fairly aggressively I would say. We see the opportunity there is continuing on, we are investing in mobile for example and seeing some great results there. Obviously, customization continues to be actually a very strong subset of our dotcom business and we see lots of innovation opportunities there that are quite compelling. But overall, DTC, and again specifically the e-commerce dimension, DTC is a huge and growing percentage of our overall business.

I think we are just at the very front end. I mean, if you look at DTC as a percentage of some of the big verticals out there, it's quite significant. So we see ourselves along with our retail partners in terms of wholesale dot-com is that there is some very significant opportunity for us and we are very, very focused and bullish.

Don Blair

And the thing that I would add to that, Omar, is that the work that you referenced earlier that we do around the digital experience for consumers and all of the digital connections we have with consumers on the brand side, we think is the multiplier of the e-commerce site.

Certainly, there is a lot of things we can do to sharpen our e-commerce platforms, but the connection points of all that traffic that's going through our brand sites and all of the connections we have with consumers, through things like Nike+, we think, have a multiplier effect in e-commerce that most pure play e-commerce players can't match.

Mark Parker

As we talked about our digital strategy, we divided into Digital Sport, which is really products and services like the FuelBand, for example, e-commerce and then communications. In communications, there's a lot of the social aspects. And as Don said, we see those all intersecting and that's where the real opportunity for Nike lies, is the intersection of all those pieces of digital in the future.

Omar Saad - ISI Group

Got you. And, then Donald, I have a real quick one question on gross margin as they kind of continue to accelerate a little bit here. What's that algorithm going to look like when your highest margin market, China return to more of a growth business and that mix shift, it goes from a drag to a benefit?

Don Blair

That sounded like a statement, Omar, not a question. That will certainly be helpful to put China back on that sustainable growth path and we absolutely are confident that we are going to get China there.

Operator

Your next question comes from Christopher Svezia with Susquehanna Financial. Your line is now open.

Christopher Svezia - Susquehanna Financial

Charlie, all the best to you in the future in terms of whatever you choose to do but all the best to you and congrats to you.

Charlie Denson

Thanks.

Christopher Svezia - Susquehanna Financial

My question is, just a follow-up on China for a second. Don, you gave some pretty good color about how we think about revenues first half, second half. Any thoughts about how we think about the margin profile in China? You didn't do so bad here in this current quarter against some easy comparisons but I guess just how do we think about that first half, second half and where maybe some inflection point could really start to happen?

Don Blair

Well, I don't want to get into that level of granularity again, but what I can do is talk to you little bit about some of the dynamics there. Certainly one of the things that was mentioned on the last question was just the high margins we have in China and one of the things that we believe is really exciting about the work we are doing right now with our retail partners is the opportunities still and the economics and productivity of the retail stores is that we can turn inventory faster.

We think we can elevate the presentation for our consumers and we think that ultimately is better from a profitability standpoint for us and for the retailers. So, yes, our margins have held up relatively well in the last quarter, and there's a lot of things that we still think we can do going forward to manage that business for a high level of profitability. But I don't want to get into the weeds of trying to guess where margins are going to be for any one quarter.

Just one thing to keep underlining here is, our goal is to get that market onto a sustainable profitable path. We are confident we can do it. We know how this works. It's just a question of working through the execution and being patient and disciplined as everybody else mentioned today.

Christopher Svezia - Susquehanna Financial Group

Okay, thank you and then just lastly just on the gross margin outlook for you. I would like to think that you guys are being somewhat conservative in terms of how you are thinking about it. You have done better than you have expected in the past two quarters or so. So I guess what maybe could be the opportunity whereby you guys could outperform your thought process in terms of gross margin. What's the biggest headwind? I think everyone might have anticipated you could have done a little bit better on the gross margin profile for this year, just given the pricing increases. So just maybe a little more color about where maybe the opportunities could be?

Charlie Denson

Well, one thing to bear in mind and I have mentioned this in the prepared remarks. There is a lot of currency headwind in these numbers for, particularly, the first quarter. So we do hedge which means that for the major currencies, we are largely protected for a period of time, but we don't hedge a 100% and there is a lot of currencies that we don't hedge, particularly developing market currencies. So, a more favorable FX environment would certainly help.

From a business standpoint, there is clearly a positive impact to managing inventories and keeping the market within that pull mode and one of the things that obviously we have been doing, as you saw our inventory numbers today, is keeping that inventory in check. So the upsides in this business model, as you know, are keep the inventories tight, make sure the brand is hot, sell-through maximum at full price and that's where the upside comes from.

So we have a lot of moving parts in here. I think, as Mark said, we are better and better at this as each quarter goes by and I hope you are right. I hope there is opportunity in the gross margin number.

Kelley Hall

Operator, we have time for one more question.

Operator

Your last question comes from Lindsay Drucker Mann with Goldman Sachs. Your line is now open.

Lindsay Drucker Mann - Goldman Sachs

I just wanted to follow-up on North America sales. There was a bit of a divergence in your footwear versus apparel sales and I was curious if you could add a little more color to that and talk whether your futures numbers also reflected a similar trend?

Charlie Denson

So, again, I am looking at the futures numbers here, hold on. Actually, they are fairly close. The futures will actually accelerate a little bit in apparel more than footwear, but they are pretty even obviously with the number in '12. We have still got great momentum in the marketplace in footwear. As we talked about over the last couple of calls, we are really focused on improving our apparel position. We think it's one of our biggest opportunities. I think we are starting to see some of that momentum and work payoff a little bit, especially in the North American geography.

Don Blair

I think this comment I made about complete offense is really a major factor in our success over this last year or really few years. It's definitely holding true as we move into, or will, as we move into fiscal '14. So, if you look at footwear and apparel, and you look across the categories, they're frankly up and down the price points. I think, we look actually quite strong in North America from a complete picture standpoint, so we continue to be bullish on the opportunities in North America as we move into fiscal '14.

Lindsay Drucker Mann - Goldman Sachs

Great. And, then just when you talk about doubling down on innovation are you talking about doubling down on your investment that we should expect much greater frequency of products with innovation associated with them or much innovation associated with it and maybe just help frame what the practical implications of that statement are?

Mark Parker

Yes. Well, first of all, as I said there has never been more opportunity to innovate than there is today. And, with that comps, it's not just more. It's better. So, we need to edit against that incredible list of opportunities and make sure that we are investing in things that we think we can leverage for the greatest success to fuel growth, improve performance, sustainability, et cetera. And, really, we have a very disciplined process by which we edit against all those opportunities.

So, yes we have some funding that we have put aside to look at getting behind some of these more compelling and innovation opportunities. I won't speak to specifically what those are, but the intent is to really rally behind those opportunities that are going to give us the greatest potential to grow the business. And, frankly, the leverage across categories price points and even the brands within the portfolio, so incredibly excited, but at the same time I know the discipline that needs to go with managing innovation to achieve the greatest impact.

Don Blair

And I would point out as you mentioned earlier. In my prepared remarks, I talked a little bit about the significant investments we have been making over the last three years particularly and our guidance for FY'14 does contemplate that as well. So, as Mark said, we've been investing in places like digital and product innovation and manufacturing innovation so on, and we would continue to do that but that is embedded in our guidance that we gave you for FY'14.

Lindsay Drucker Mann - Goldman Sachs

Great. And then just one last one, you talked about the higher share count being a headwind to some degree of your EPS growth for next year and I think of a pretty easy solution to that considering. All the cash you guys are sitting on, so maybe just could you talk about what you plan to do with your extra $1 billion and your balance sheet?

Don Blair

Well, we do anticipate continuing to increase cash returns to shareholders and I think you are well aware of our record on dividend. And, certainly, buying our own stock is going to be a component of that as well and we do expect to be strong buyers of our own stock. We try to do that as efficiently as we can. And, obviously, your ability to see into the future is always a little murky, but we are very enthusiastic about returning cash to shareholders as well as investing in the business and that debt offering we felt was well timed to give us the flexibility going forward to continue to do both.

Lindsay Drucker Mann - Goldman Sachs

Great. Thank you.

Kelley Hall

Well, thank you, everyone. Appreciate you being with us today. Thanks to Charlie one more time for his final call with us and we will talk to you all again on Q1 earnings call.

Operator

And this concludes today's conference call. You may now disconnect.

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