Highlights From Nike's (NKE) Q4 Conference Call: CEO Sees "Swoosh Shaped" Recovery

Last night, Nike (NYSE: NKE) reported Q4 non-GAAP EPS of $0.99, 3 cents better than the analyst estimate of $0.96. Revenue for the quarter was $4.7 billion, versus the consensus of $4.72 billion. Shares are down 3.5% today at around $51, well off the 52-wk high of $68.

Highlights From NKE's Q4 Conference Call:

• (CEO)In fiscal '09, revenues are 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.
  
• Our strong working capital management, which was a key driver in delivering over 1.2 billion of free cash flow from operations.
  
• Over the past nine months, we restructured the company to move into our next phase of growth. That included laying off over 1,750.
  
• I believe their (consumers) heightened sense of caution is likely to continue for the foreseeable future.
  
• 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.
  
• Nike continues to be a growth company and while we see glimmers of economic recovery, we still have a challenging road ahead.
  
• 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 also expect some continued headwinds against gross margins mostly due to currency fluctuations.
  
• 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 under way. Some experts suggested a V-shape recovery characterized by a quick drop in rebound, which now seems unlikely. Others predicted a more prolonged U-shaped recovery. I prefer the way the business media are describing a third option, a quick drop followed by measured yet consistent recovery. They called it
  the swoosh recovery because it mimics the shape of our logo. I'm going to go with that one.
  
• (President, NIKE Brand) On the year, the Nike brand generated record revenue, up 4% to nearly $17 billion with constant dollar revenue growth in every region, except EMEA, which was flat.
  
• Footwear generated revenue of $10 billion and apparel came in at $5 billion.
  
• And we finished the year with inventories in pretty good shape, down 3% year-on-year.
  
• So a good solid performance. Thanks in part to the fact that we're having one of the greatest years in sports that we've seen in some time...It's been a phenomenal run that shows no signs of letting up.
  
• Basketball experienced double-digit growth on the strength of the Jordan brand, which had a very strong year. Action sports, our newest key category had significant double-digit growth, men's training was down slightly.
  
• Women's training had its biggest quarter ever in Q4, and we're focused on building that momentum. And finally in football, it was flat.
  
• The number one selling shoe on Nike.com is the Air Max Plus at $160.
  
• On the apparel side of the business, we're seeing a deeper impact from the macroeconomic conditions.
  
• The U.S. and Western Europe are going to continue to be challenging in fiscal 2010. But we do see opportunity to gain more share going forward. In China, we're anniversarying some great numbers post-Beijing.
  
• (CFO) In fiscal 2009, we made adjustments to our business to minimize brand risk, maximize liquidity and offset a significant portion of the impact of the economy in our P&L.
  
• Excluding FX, fourth quarter revenues were in line with last year. On a reported basis, revenues declined 7% to 4.7 billion.
  
• Futures orders for Nike brand footwear and apparel scheduled for delivery from June through November 2009 declined 5% on a currency-neutral basis.
  
• Futures were lower in comparison to strong orders last year, but also reflect the impact of a significantly more difficult consumer environment. On a real dollar basis, futures declined 12%.
  
• Excluding the current-year restructuring charge and a prior year gain associated with the sale of Bauer Hockey, diluted earnings per share would have increased 5% to $0.99. For the year, diluted EPS declined 19% to $3.03.
  
• SG&A in the fourth quarter was down 17% versus the prior year. Excluding the impact of currency changes, SG&A fell 11% including a 25% reduction in demand creation and a 1% reduction in operating overhead.
  
• As a result, on May 31 our cash and short-term investments totaled $3.5 billion or about $7 a share; subtract our outstanding debt and we still had over $5 of cash on the balance sheet for each Nike share.
  
• Revenues in the U.S. region were down 2% for the fourth quarter, but grew 2% for the full year.
  
• For the quarter, comp store sales for in-line stores declined 29%, driven largely by lower traffic.
  
• Excluding the currency impact, full year footwear revenues increased 4% and apparel declined 4%.
  
• Revenues were flat in the U.K.
  
• Reported fourth quarter revenues for Asia were flat, but grew 3% excluding currency changes.
  
• For the year, revenues in China grew 22%. As expected, in Q4 growth slowed to 6% on top of over 60% growth in the fourth quarter of fiscal 2008.
  
• On a wholesale equivalent basis, the Converse brands represent over $2 billion of revenue worldwide.
  
• We expect a low-to-mid-single digit percentage reduction in operating overhead for the year, with the savings weighted toward the first half.
  
• We anticipate that other incomes should decline given foreign exchange headwinds and our effective tax rate will be approximately 25.5%.
  
• And finally, we're projecting continued strong cash flow generation in FY '10, driven by ongoing focus on working capital management, and CapEx roughly inline with FY '09 levels.
  
• (Q&A) Wanted to follow-up on the sourcing, the restructuring in your sourcing business and the consolidation there with your partners. Can you go in a little bit more detail and give us some color around where you're starting from, where you're going to. Is it just on the footwear side, or is it across all the categories? How many partners do you have and how many can you get it down to? And is it - is there a real scale opportunity that some of these operators can drive higher volumes through their existing capacity? (A) Well, we've been pursuing consolidation over a period of time in both footwear
  and apparel. And on the footwear side, we have significantly fewer factories and partners. At this point probably in high 30s and that will be moving down more towards 30. So that consolidation really is around our strongest and most innovative, most efficient partners, and we think that both in the footwear and apparel side the impact of this is that we not only maintain capacity and give ourselves the opportunity for future expansion as needed, but also are able to leverage both economies of scale as well as technological improvements. Things like lean manufacturing, for example. On the apparel side, we have quite a few more factories in the low 100s for the main factory partners, and there's going to be obviously some more significant changes in that structure, but the net of both of these is
  that we really are consolidating with our strongest and most innovative partners.
  
• And then a follow-up question on profitability, if it's okay. I noticed in the quarter, great profitability regionally the EMEA, Asia-Pacific, Americas kind of the pre-tax margin, segment margins in those
  business is way up, whereas the U.S. lagged a little bit there kind of year-over-year. What's the dynamic going on there, and how should we think about that going forward as you kind of think about allocating your resources in investments and spending around the different regions? (A) Well, I think - when you think about it overall, the U.S. has always been a little bit more of a - I'll use the term tightly wound marketplace. So we have a little bit more price elasticity in some of the international markets. And I think you saw some of that coming through on a management basis as you saw the results for Q4. I think as we go forward, we still believe that the U.S. offers us a market that we can grow in. We're going to continue to focus on the U.S. as a growth market as well as the international markets and the emerging markets specifically, in the short-term. As you think about over the next 12 to 18 months, China and some of the emerging markets, South America continues to perform well where we're still building out some of our business infrastructure. So I think that's where you're - that explains some of that. Western Europe will continue to be one of the most challenging markets, both economically and from a consumer standpoint, you're seeing some dramatically high unemployment numbers coming out of Western Europe. And I think that will always be an indicator for us as we move into this next 12 to 18-month period.
  
  Nike, Inc. designs, develops, and markets footwear, apparel, equipment, and accessory products worldwide.
  
  

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