Nike, Inc. (NKE)
Q4 2009 Earnings Call Transcript
June 24, 2009 5:00 p.m. ET

Executives

Pamela Catlett - Vice President of Investor Relations
Mark Parker - President, Chief Executive Officer
Charlie Denson - President, Nike Brand
Don Blair - Chief Financial Officer, Vice President

Analysts

Omar Saad - Credit Suisse
Kate McShane - Citigroup
Robert Drbul - Barclay’s Capital
Robert Ulm - Banc of America Merrill Lynch
Christopher Svezia - Susquehanna International Group
Sam Poser - Sterne, Agee & Leach
Michelle Tan - Goldman Sachs

Presentation

Operator

Good afternoon, everyone. Welcome to Nike’s fiscal 2009 fourth quarter conference call. For those who need to reference today’s press release, you will find it at www.nikebiz.com. Leading today’s call is Pamela Catlett, Vice President, Investor Relations. Before I turn the call over to Ms. Catlett, let me remind you that participants of this call will make forward-looking statements based on current expectations and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in the reports filed with the SEC, including forms 8-K, 10-K, and 10-Q. Some forward-looking statements concern future orders that are not necessarily indicative of changes in total revenues for subsequent periods due to mix of Futures and at-once orders. Exchange rate fluctuations, order cancellations, and discounts which may vary significantly from quarter to quarter. In addition, it is important to remember a significant portion of Nike Inc.’s business, including equipment, most of Nike Retail, Nike Golf, Cole Haan, Converse, Hurley, and Umbro are not included in these futures numbers.

Finally, participants may discuss non-GAAP financial measures. The presentation of comparable GAAP measures and quantitative reconciliations are found at Nike''s website. This call might also include discussion of non-public financial and statistical information, which is also publicly available on that site, www.nikebiz.com. Now I would like to turn the call over to Pamela Catlett, Vice President, Investor Relations.

Pamela Catlett – Vice President Investor Relations

Thank you and thank you, everyone, for joining us today to discuss Nike''s fiscal 2009 fourth quarter and year-end 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 on our website, nikebiz.com. Joining us on today’s call will be Nike Inc.’s Chief Executive Officer, 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 and I will now turn the call over to Nike Inc. President and CEO, Mark Parker.

Mark Parker – Chief Executive Officer

Thanks, Pam and good afternoon, everybody. Actually, before I get going, I just want to acknowledge that this is Pam Catlett’s 40th earnings call with Nike and so I want to congratulate Pam on that milestone and all the great work that she’s done for Nike over the years, so cheers to Pam. Okay, so back to the call here, it’s no surprise that fiscal year ’09 was a tough one for the global economy. Looking back at the past 12 months, one of the most important challenges we’ve faced was defining what success means for both the near and long-term. For many companies, success was defined as simply surviving. As we’ve said in the past, we intended to do more than just survive. We plan to emerge from this downturn competitively stronger.

To do that, we focused on the things that keep us healthy and opportunistic. Specifically, we build even stronger relationships with our consumers, we maintain the integrity of our brands, we strengthen our operational capability, and we deliver appropriate financial performance while positioning Nike for sustainable, profitable growth over the long-term. These are the commitments that allowed us to deliver a remarkable performance given the current environment. Q4 revenues were steady on a constant dollar basis and we significantly outperformed our key competitors and gained share in most major markets. In fiscal ’09, revenues were $19.2 billion, and we delivered comparable EPS growth of 10% thanks to industry-leading product, strong cost management, and benefits from our tax planning initiatives. I am particularly pleased by our strong working capital management, which was the key driver in delivering over $1.2 billion of free cash flow from operations, and we did this all while consumers and many companies adopted a conservative wait-and-see attitude.

But Nike has never been a wait-and-see company. We worked quickly and effectively to mitigate global economic pressures through strict SG&A discipline. Over the past nine months, we restructured the company to move into our next phase of growth. That included laying off over 1,750 friends and teammates around the world. We did it for all the right reasons, to build a leaner and stronger company, reduce costs, and better leverage our resources against our greatest growth opportunities. I wish I could say that made it easier for everybody. It didn’t.

We continue to do the hard work inside Nike, making the tough calls on resources, taking action on operating expenses, and that’s delivering good results. Still, we are an externally focused company. There are really two big questions that we have to address, big question number one is where is the consumer going to land in this new economy, and what does it mean for Nike? So we all know that the challenging economic environment has affected consumer confidence and consumption. I believe their heightened sense of caution is likely to continue for the foreseeable future but that said, I believe markets will not be driven by the frugal consumer but by the focused consumer. Consumers continue to look for what they have always valued, focusing on brands and products that they know deliver authenticity, performance, and innovation and that’s a great opportunity for Nike as it plays right into our core strengths. It’s also the reason for our strong performance and share growth over this past year. Is there room for our premium product in today’s economy? Absolutely, and we’ll continue to deliver high-end, high performance concepts like the material boot, the Air Jordan ’09, Pro Combat apparel, the Air Max Plus 9, and the Lunar Glide.

But innovation does not stop at the $100 price point. We are busy creating sharper and more compelling products up and down the price ladder and that’s especially appropriate for the times we are in. Just because the consumer has to choose doesn’t mean they have to sacrifice. This is part of the complete offense approach you’ve heard me talk about for many years and I think it is especially relevant and strategically important right now. We are also being much more surgical and opportunistic in how we reach consumers with our products and brands. The deeper we drill, the more we can grow markets and take share. That means reaching out to consumers through their sport of choice, where they live, by product type, by channel, by season, by price, and ultimately right down to the individual item. There are multiple points of contacts and relevance between Nike and our consumers and we are leveraging all of those interactions in innovative ways.

This is also part of our complete offense, product creation, deep consumer connections, and marketplace management all driven by our fixation on innovation. It’s the same approach we’re taking throughout our portfolio of brands. On the year, our subsidiary brands contributed $2.5 billion in revenue. Converse and Hurley continue to outperform the market, picking up share and building brand strength. Cole Haan and Nike Golf continue to innovate as they manage through the tough environment while effectively managing inventory. And with our first year of Umbro in the books, I look for this great brand to continue gaining momentum as we head to the World Cup in South Africa. And just one more word about Converse, which continues to be a real standout performer within the portfolio. Brand strength for Converse is at an all-time high and that strength is translating well in markets around the world. Moreover, I recently reviewed the product in the pipeline for Converse and I have to tell you it’s incredibly strong and diverse. I think it’s the most commercially potent product we’ve ever created.

I said up top that there were two big questions. Big question number two is what’s the outlook for fiscal 2010? Nike continues to be a growth company and while we see glimmers of economic recovery, we still have a challenging road ahead. Some economists are already calling the bottom and others see a more fragile environment. Even if the worst is behind us, we’re taking an approach that’s both prudent and opportunistic. Healthy and smart is the way forward. We are targeting modest growth and will continue to take a conservative position on inventory purchases generally buying to Futures orders. We also expect some continued headwinds against gross margins, mostly due to currency fluctuations. We’ll obviously leverage every opportunity to offset margin pressures over the year ahead. That said, we’ll continue to explore opportunities to invest in the short-term and in long-term growth.

As for the larger economy, there are many ways to describe the recovery underway. Some experts suggest that a V-shape recovery, characterized by a quick drop and rebound, which now seems unlikely. Others predicted a more prolonged U-shape recovery. I prefer the way the business media are describing a third option, a quick drop followed by a measured yet consistent recovery. They call it the swoosh recovery because it mimics the shape of our logo. I’m going to go with that one.