Welcome to NIKE's Fiscal 20 11 Second Quarter Conference Call. Leading today's call is Kelly Hall, Senior Director, Investor Relations. Before I turn the call over to Ms. Hall, let me remind you that participants on this call will make forward looking statements Good afternoon, everyone.
Welcome to NIKE's fiscal 2011 Second Quarter Conference Call. For those who need to reference today's press release, you will find it 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 ks, 10 ks and 10 Q. Some forward looking statements concern future orders that are not necessarily indicative of changes in total which may vary significantly from quarter to quarter. In addition, it is important to remember a significant portion of NIKE, Inc.
Business equivalent sales include both reported revenue and estimations of sales by licensees based on the royalties paid. References to total wholesale equivalent sales are only intended to provide context as to the overall current market footprint of the references to other non public financial and statistical information on 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, www.nikebiz.com. Now, I'd like to turn the call over to Kelly Hall, Senior Director of Investor Relations. Thank you, Ms.
Hall. You may begin.
Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE's fiscal 20 10 or 20 11 second quarter 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, nikebiz.com. Joining us on today's call will be NIKE, Inc.
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 financial results. Following their prepared 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 2. In the event you have additional questions that are not covered by
and the exciting opportunities we have across the entire NIKE, Inc. Portfolio. We grow almost every area of our business across brands, categories, products and geographies. What fuels this growth is our long term strategy. It was not short term in nature.
We leverage the same competitive advantages that have driven NIKE growth consistently throughout our history, putting the consumer first, fixating on innovative product and leveraging the power of our portfolio. Like any great athlete, we have strong fundamentals. We're able to anticipate and react to opportunity and we stay on the offense. That's what leaders do, stay flexible and balanced. It also aggressive and aligned to create and leverage opportunity.
And that's what we did in Q2. NIKE, Inc. Revenue was up 10%, NIKE brand revenue increased 9%, revenue for our affiliates brands grew 13%, and as a result, we delivered earnings per share of $0.94 to our investors that's up 24 percent over last year. The flexibility and power of our portfolio continue to build and that's a crucial advantage for NIKE. We can really fine tune how we apply our resources for the greatest return and we're doing just that across the entire business.
We can attack with a single brand like Converse, which just exceeded $1,000,000,000 in reported revenue for the past 12 months or leverage multiple brands like we do futures are up double digits. We can expand key developing markets like China or Russia, which continue to increase revenue, EBIT and futures. And in developed markets like North America, where innovative product, strong brands and great retail presentation very focused on balancing our resources against our biggest opportunities. This is especially powerful when we leverage innovation to drive and it's true in how we run the business. Both NIKE brand footwear and apparel continue to accelerate.
NIKE brand footwear revenue and futures continue to grow at double digit rates and that growth is not based on any single sport or product. It's the result of our category offense and its mix of innovation and key franchises that we use to drive top line revenue. In Nike apparel, we you can expect to see it expand significantly across multiple sports around the world in the months ahead. That success in performance apparel is behind the growing momentum we see across the entire apparel business. We're delivering key to being compelling and distinctive in the market.
Innovation also drives how we run the business and how we invest to prepare for long term success. Sustainability is a great example. We're very active in this space. Lean Manufacturing, Open Source innovation, renewable energy, closed loop manufacturing, these are some of the commitments we're making now for the future. We're not waiting.
This is good for the planet and it's important to the success of our business. In an increasingly resource constrained world, the more proactive we are, the more nimble and profitable we become. So when I look at our innovation pipeline, I see a lot more than footwear and apparel. I see a relentless flow of ideas and opportunities that serve our consumers,
our
Finally, we put the consumer at the center of everything we do and we align ourselves to that consumer. NIKE, Inc. Is a company of highly distinctive brands. For us to perform at our best, these distinctions need to be clear and compelling wherever we interact with consumers. When we opened our in line commerce stores in Boston and New York this quarter, consumers experienced a fully integrated mix of product, brand and storytelling.
That's what they expect from us, whether it's in the Nike town in London, a Cohan store in New York or an action sports store in California. And we're seeing that commitment to the consumer drive strong sales performance. This focus on alignment drives 2 things, growth in our own retail business and more consistency, innovation and inspiration into our retail partner doors. I've said many times when we become a better retailer, we become a better wholesaler. I think we're seeing that play out as we continue to align new concepts and experiences and launch them in the marketplace.
And we're doing that across entire business. Looking ahead, we'll continue to do those things that enable today's great results. Listen to the athletes, serve the consumer, stay nimble and aggressively pursue opportunities across the NIKE, Inc. Portfolio. It's a some continuing macroeconomic challenges.
As supply and demand find a new normal in the recovering economy, our industry is going to experience margin pressure due to rising input costs. While the impact of these cost pressures has been delayed for us, these factors not diminished. We expect to see these external forces play out for the remainder of the fiscal year. However, the same competitive advantages that fuel our long term growth gives us the levers we need to help manage the impact of macro forces over the coming quarters. You've heard me speak of NIKE's complete offense and Q2 is a great example of that offense in action.
Strong performance from our brands and categories, great new product for consumers, meaningful events around the world, exciting new retail experiences in store and online, and that's the real power of NIKE flexibility, balance and alignment.
Now, here Charlie to take
you through the NIKE brand. Thanks, Mark. Good afternoon, everybody. I feel great about where we are halfway through the year. Q2 is another example of our ability to align innovative products, brand strength and strong marketplace management to deliver great financial results.
But as always, the proof is in the numbers. Q2 reported revenue for the NIKE brand grew 9% or up 10% on a constant dollar basis with higher revenue in every geography except Japan. Cost and dollar futures are up 11% with growth in all 7 of our key categories and our NIKE direct to consumer businesses grew double digits, including strong comp store growth in our outlet and inline stores and the 15th consecutive quarter of double digit sales growth online. Our performance in Q2 is not just about the last 3 months. It's about the last 3 years and the steps we've taken to grow the market worldwide, creating strong momentum around the brand even in uncertain times.
The strategic moves we've made to ensure our America. I'm often asked how are we able to grow in this developed market? The key is our category offense. Each sport has its unique athletes, cultures and consumers. We're always looking for new ways to connect with them on a deeper, more meaningful level.
And we're seeing results across the business, including 2 of our biggest growth opportunities, apparel and retail. Our performance apparel led by innovations like Nike Pro continues to drive revenue and opportunity for the entire apparel business. Nike Pro is the standard for base layer comfort and between on field performance and consumer preferences off the field. We continue to leverage that connection, contributing to great results like we see in the North America business, where apparel revenue and futures increased over 20%. And we're seeing it at retail, in our brand new brand experience stores and in stores operated by our strategic retail partners around the world.
That's where we deliver innovation to the athlete from competition to training to what they want outside the gym. There is still a lot of opportunity to improve and grow in this space, but we're making good progress. One quick category example is running with its own unique athlete and consumer focus. Our momentum in running is incredible and it's something we're very proud of. Running is one of our biggest and most important category businesses.
It's where this brand began and it's a big part of our heritage. One thing we like to do on these calls is point out where we're putting our focus and then update you on our progress. Well, just over 2 years ago, we started to ramp up our new category offense. Running was one of the areas felt could benefit most. As Mark often mentions, we've amplified our innovation agenda.
Our key technologies like Lunar, Nike Free and Flywire continue to reflect the insights we get from our athletes and consumers. We also committed to renewing that passion for the Nike brand with committed running consumer, putting a lot of that emphasis on young runners and the new running boom that we're fueling around the world. So we set out to create authentic and dramatic experiences for those running consumers. In Q2 alone, we executed 105 events in 28 countries with over 850,000 runners, an all time record for NIKE. And it all comes together in stores like our running only destinations in Stanford, California and Covenant Garden in London.
And we've transformed over 400 running retail partner destinations year to date. It's a global strategy that we will continue to execute with our direct to consumer business, our brand retail partners and especially with the core specialty running shops that serve the Sirius runner. That's our strategy, innovative product, strong brand and compelling experiences in the marketplace. Our running footwear and apparel products are performing extremely well. Revenue is up double digits and futures are up and accelerating.
I can tell an equally dramatic story around the basketball business or even football. Our category focus and execution is how we build and accelerate momentum in a developed market like North America. And we're doing that across the business and around the world. Again, all work in progress, but we certainly like the path we're on. I usually take a quick spin around the world to review our global results.
But today, I just want to call out our becoming more important with each quarter. Markets like Brazil, Mexico and Korea are playing a bigger role in the Nike growth story. We have strong teams the ground and they're connecting with consumers who have a huge appetite for sport and sport lifestyle. That's right in our wheelhouse. It's a model that continues to help the emerging markets geography grow even faster than the overall NIKE business and it's showing up in the results with constant dollar revenue percent and double digit features growth.
I'm sure we'll be talking much more about this in the coming years. As we wrap things up around the NIKE brand, I'll share a few things that we're focused on to increase our momentum as we go forward. I'm very excited about partnership with the NFL. It's one of the biggest and most meaningful sports marketing investments in our history, and I'm confident we'll bring the most innovative performance product to the game at the highest level, something you will hear a lot more about as we get closer to that 2012 season. On the digital side, we've seen great momentum online over the last couple of years, and I truly believe we are seeing just the tip of the iceberg of what we can achieve.
Cyber Monday was our biggest ever, and we continue to build meaningful connections with our running, training and football apps, which give our consumers a way to connect with their favorite sport in a way that only NIKE can provide. Look for us to continue to bring unique products and experiences to our consumers as we leverage the potential of nikistore.com. And finally, I see tremendous potential in women's training. We're excited by the renewed interest women have in core fitness and its natural connection to the authentic performance of the NIKE brand. And we have more great performance product coming, led by our NIKE free technology.
The women's product will be one of the major highlights of the free campaign this spring. Going forward, costs as we move through the back half of the year and we'll continue to review all the elements of gross margin to maximize opportunities for improvement. You can expect given the strong demand for our brand and products for us to continue to airfreight select product as we work with our manufacturing partners to expand capacity. While we won't be able to completely offset the impact of macro cost pressures in the near term, we'll use the considerable margin levers we do control sizable portion of them. Finally, something I don't often talk about, and that's our people, not just the management team, but the entire worldwide NEG, Inc.
Team. Our business is complex and we run it with an efficiency and a flexibility that is unmatched in our industry. That's a huge competitive advantage for us, especially in times like these. So I just wanted to recognize everyone around the world for such an amazing job. Have a great set of holidays, everybody.
And with that, here's Don to take you through a bit more on the results. Thanks, Charlie.
On our call today, we want to leave you with 3 key messages. First, that our business strategies are resonating with consumers laying a foundation for long term sustainable revenue growth. 2nd, that over the next few quarters, we expect to face gross margin headwinds along with the rest of our industry, but believe those headwinds will ease over the next 12 to 18 months and that we're in the best position to offset their effects. And 3rd, that we'll continue to stay focused on driving growth and delivering strong returns to our shareholders. Let me take each of these in turn.
The first key message is about sustainable growth. Our second quarter results illustrate that our business strategies are resonating with consumers across our brand portfolio and in both developing and developed markets. Consumer sentiment is improving, but not all brands will benefit. Today's consumer is seeking value broadly defined. They're looking for brands that connect to their lives, deliver innovative products and create compelling presentations wherever they shop.
Consumers are picking the winners and our results demonstrate they're picking NIKE. We believe that as we drive our strategies around the world, we'll deliver growth for years to come. The second key message, we'll face strong gross margin headwinds for the next few quarters. The combination of rapidly recovering demand and reductions in supply have driven higher costs for inputs such as labor and cotton, as well as transportation costs as companies work to meet demand. In addition, uncertainties in the currency markets have strengthened the dollar versus the euro and the pound.
Even so, the strength of our brands and business model give us greater ability to offset these headwinds. And we do expect them to moderate as supply and demand come into balance and as economic fundamentals again drive the currency markets. The 3rd key message, we'll continue to stay focused on driving profitable growth. We're confident in our strategies and we're going to invest in them to drive revenue. And as we have for the last decade, we'll maintain our financial discipline to deliver growth in profits and cash flow, creating value for our shareholders.
So with that context, let's review our results for the quarter. NIKE, Inc. Revenues increased 10% for Q2 and were 11% higher on a currency neutral basis. For the NIKE brand, revenue grew 10% in constant currency with increases in every category except sportswear and every geography points better than the prior year. The positive drivers were a higher mix of full price sales, lower discounts on closeouts and and the impact of our product cost reduction initiatives as well as faster growth and higher margins in our direct to consumer businesses.
These upsides more than outweighed higher costs for air and ocean freight. The drivers of gross margin were those we expected, although the negative effects of FX and higher input and transport costs were less than what we had anticipated. Diluted earnings per share grew 24% to 0.94 dollars reflecting revenue growth, higher gross margins, SG and A leverage and a slightly lower share count. For the first half of FY 'eleven, we've delivered $452,000,000 of free cash flow from operations and raised our trailing 12 month ROIC 430 basis points to 21.2%. We're proud of the work we've done to maximize capital productivity, particularly our focus accounts receivable and inventory.
As of November 30, accounts receivable were 3% higher than last year, well below the 2nd quarter revenue growth. And after 6 consecutive quarters of decline, inventory at November 30 increased 8%, well below the 11% growth in futures we reported today. Now let's take a look at the 2nd quarter results by segment. Revenue for North America increased 13% on a currency neutral basis, reflecting double digit growth in wholesale equivalent revenues. All categories except sportswear grew versus the prior year, led by double digit growth in running, basketball and men's and women's training.
Currency neutral futures increased 16%, the highest growth in over 10 years driven by double digit increases in all categories. North America direct to consumer sales increased 17% for the quarter as comp sales
in
continues to deliver exceptional growth in North America with currency neutral revenues up 22%. Part of that growth is due to the development of new category concepts with retailers such as Foot Locker, Finish Line and Dick's, which have increased apparel space and consumer demand. Quarter, currency neutral revenue for footwear increased 10% driven by accelerating demand for our LUNAR and NIKE free running products and new basketball products. Footwear futures grew 15% with balanced growth across every category. 2nd quarter EBIT for North America grew 24% driven by revenue growth and SG and A leverage.
In Western Europe, Q2 revenue fell 7%, but grew 2% on a currency neutral basis as most territories reported higher revenue for the quarter. Football and running were the key category growth drivers. On a currency neutral basis, footwear grew 6% and apparel was flat. Europe declined 19% primarily due to currency headwinds which lowered revenues, put pressure on gross margins and reduced the dollar value of euro denominated profits. SG and A also rose as we continue to make investments in our direct to consumer business and low levels of spending in Q2 last year.
Central and Eastern Europe's positive momentum continued in Q2 as revenue grew 7%, up 12% on a currency neutral basis. Revenues in Russia increased 40% and both Turkey and Central Europe grew double digits. All categories reported higher revenues with football and running the key drivers. Currency neutral futures rose 11 percent even with tough comparisons to the World Cup. Q2 EBIT for Central and Eastern Europe declined 10% 20%, including 2 percentage points of currency grew 20%, including 2 percentage points of currency benefit.
Growth was fueled by expanding points of distribution and strong performance in running, basketball and men's training, which all increased more than 20%. Currency neutral futures grew 14% with double digit growth across most key categories. Q2 EBIT for Greater China increased 39% driven by revenue growth, higher gross margins and SG and A leverage. As Charlie mentioned, our emerging markets geography continued to deliver impressive results in the 2nd quarter. Revenue increased 24% reflecting 19 percent growth on a currency neutral basis.
Every category and every territory except Australia and New Zealand posted higher revenues with Brazil, Argentina, Mexico and Korea driving the largest share of the growth. Futures grew 15% as all categories grew except football reflecting comparisons to
the World
Cup. EBIT for the emerging markets increased 13% as revenue growth was partially offset by higher SG and A and lower gross margins. In Japan, fell 20%. In light of ongoing macroeconomic weakness in a highly promotional retail environment, we we continue to focus on strengthening our brand and protecting profitability by closely managing our product flow, cost structure and balance sheet. Although gross margin is up and both SG and A and inventory are down, we believe it will take time before we see significant improvements in growth and profitability.
2nd quarter revenue for our other businesses increased 13% on a reported and currency neutral basis reflecting double digit growth at Cole Haan, Converse, Hurley and Umbro. Nike Golf grew at a single digit pace. EBIT for the other businesses grew 69% driven revenue growth, higher gross margins and SG and A leverage. With the first half in the books, we're well positioned to deliver our goals for the full year, which have not changed. On a currency neutral basis, we expect revenue for Q3 in the fiscal year to grow at the top end of our high single digit range, with reported revenue growth slightly lower due to weaker foreign currencies.
We anticipate gross margins for the second half of the fiscal year will be below record levels in the second half of FY 'ten as the downward pressure from input costs has been delayed, but not eliminated. As we purchase product for calendar 2011, we're seeing the effects of higher input costs such as cotton and labor. Given the scope and complexity of our product lines and supplier base, changes hard with our suppliers to increase capacity, we also expect higher than normal levels of airfreight at least through the first half of FY 'twelve to meet strong demand. To mitigate the impact of these headwinds, we'll continue to leverage our strength and scale. That means continue to work with our suppliers to increase capacity and reduce product costs.
It means continuing to manage the marketplace by keeping inventories tight, minimizing closeouts and maximizing margins, including margins in our direct to consumer operations. And it means continuing to to Specifically, we continue to expect full year FY 'eleven gross margin to be at least 50 basis points below FY 'ten with positive results in the first half more than offset by second half headwinds. We expect Q4 to be more significantly affected than Q3 as cost pressures intensify and comparisons to the prior year become more challenging.
We expect demand creation to grow at a mid single digit rate for
the year with Q3 growth in the high single digits and Q4 spending below the prior year as we anniversary heavy investments in the World Cup. We expect operating overhead to grow at a mid single digit rate for the year, reflecting increased investment in our direct to consumer businesses balanced by increased efficiency in our core operating functions. For Q3, operating overhead should grow at a high single digit rate as the result of our direct to consumer investments and the timing of stock option expense this year. We anticipate that other income for each of the last two quarters of this fiscal year be broadly consistent with Q4 of FY 'ten as the stronger dollar creates gains on our foreign currency hedges. Finally, we now expect our effective tax rate for FY11 to be roughly in line with
the year to date rate. With that, we're now
Our first question comes from the line of Kate McShane with Citigroup. Please proceed with your question.
Thank you. Good afternoon.
Hi, Kate. Hi, Kate.
Hi, Kate.
I was wondering if you could quantify a little bit more the inflationary pressures you're expecting for the second half. How much are you offsetting labor cost increases with some of supply chain efficiencies you've been working on? And how much are you offsetting overall higher costs through any possible reengineering of some of your styles or any other kind of negotiations you're doing with your factories?
Well, I think where I'd like to keep the conversation, Kate, is where we expect the overall number to be. There are tremendous number of moving parts in gross margin. As we've we've said, we've had continued success driving costs down. You're very familiar with lean manufacturing initiatives and we continue to make progress in footwear and apparel and and price increases. So those are all benefits that we expect to continue to realize over the balance of the year.
What we do think is that as we look forward, we're going to see input costs increase notably cotton, labor we talked about. Those are things that we see increasing for a short period of time, call it the next 3 or 4 quarters at this stage. And then as those ease, we think that those long term benefits of cost reduction initiatives are going to flow through the margin.
Okay, great. And then my second question completely unrelated to the first is, can you update us on China and your strategy for entering or continuing to penetrate into the lower tier cities? And can you quantify how much of your business is in fact in the Tier 3 and Tier 4 cities at this point in time?
Hi, Kate, this is Charlie. Well, we are continuing to move out into the broader geography into the Tier 3, 4 cities. I don't have the numbers, the breakdowns between the cities here,
maybe we can follow-up.
But I would expect us to continue to see growth coming out of that expansion. As we reported here, the China numbers continue to be very strong. Our inventories continue to be in pretty good shape there, and we've seen a great appetite from that consumer across some of the key categories like basketball, football and running. So, we're still pretty bullish on the China long term and short term we'll continue to expand distribution out into the broader geographies.
And Kate, just to be clear, we're not expecting to be going down market in those cities. Our strategy is consistent across the board. We're a premium brand and we're going to continue to sell at prices that you would find around the rest of
the world. Converse is another lever that is more attractive for us to pull in the China market, gives us a little more range in terms of price and position in the marketplace. So that's Converse is becoming a bigger factor for NIKE, Inc. In China as well.
Our next question comes from the line of Bob Drbul with Barclays Capital. Please proceed with your question.
Hi, good afternoon.
Hi, Bob.
I guess the first question is a little bit more on China overall. The number is still very strong, but there's definitely some concern around if there's a slowdown. So I was wondering if you might be able to talk a little bit more on market share in terms of where you think you are and sort of gains? And is there a number on points of distribution that you could share with us at this point in time?
Bob, this is Charlie. Well, let
me take the market share piece again, the numbers are always from a share standpoint, a little harder to acquire in China as you would expect than maybe some of the other more developed or mature markets around the world. We do a lot of brand strength monitoring as well, which is in fact we see is almost as well as actually probably more important than the actual share numbers. Both those numbers are very healthy right now. We retain the number one position in the country and I would again, we're we feel very good recently, but we're again, we feel very good about both the brand and the business in China and its ability to continue to expand and grow. Okay.
What was the second part of that question?
Just like a number on points of distribution?
I mean, we are we haven't we've gotten away from sharing that. We continue to see expansion both in standalone shops, shop in shops, whether it's through the department store channel. You've been to China, you've seen how that marketplace mono brand presentation, all the way, as a mono brand presentation all the way along the throughout the distribution network into the even into the new cities. And we're starting to put a few more factory stores down in China as well to continue to maintain marketplace integrity and brand integrity on the inventory levels.
Great. And I guess my second question is, I was just wondering if anybody there had a prediction on the football game score on January 10th and how many push ups the Oregon mascot is should be prepared to do?
Well, we're highly one-sided. I'll say that much for it.
All right. Thank you very much, guys. Happy holidays.
Hi, Eva. Next question please.
Our next question comes from the line of Michelle Tan with Goldman Sachs. Please proceed with your question.
Great, thanks. My question was on inventory relative to demand. I think you mentioned that you still expect to airfreight quite a bit of product. But on the surface, it looks like your inventory growth has largely caught up with what you're seeing in terms of order growth. So where is the disconnect?
Is there a timing shift? What is it that you're still chasing from an inventory perspective?
Well, one of the things, Michelle, is if you go back to some of the introductory language that we've heard so many times that we don't necessarily listen to it anymore, there's a lot of parts of the business that are not on futures, the combination of those 2, you wouldn't see in the futures number. The other issue is just which products you're talking about. We've had colossal demand for a lot of the new product innovations, particularly in the running space and some of our apparel styles. So, keeping up with demand for this leading edge product is really part of what's generating that airframe.
Great. Thanks. And then sorry if I missed it earlier, but have you guys given the trend in futures through the window first half versus second?
It's really not much difference between the front and the back half.
Okay, great. Thanks. Good luck with the holidays.
Thank you. Thanks, Michelle. Operator, next question please.
Our next question comes from the line of Chris Svezia with Susquehanna Financial Group. Please proceed with your question.
Good afternoon, everyone. I just want to go back to the futures number for one quick moment. I guess two points to this question. When you guys reported your Q1, you just made the observation that the back end of the futures window was stronger than the beginning end of the forward piece of the features window. I'm just kind of curious as you've kind of seen overall sort of the mild sequential fall off constant currency, was there anything unusual in terms of that happened
as the quarter progressed or
it's just typical business in terms of flow cancellations, etcetera that happened as the quarter unfolded?
I'm sorry, you're talking about the last quarter or the futures we just reported?
No, the last quarter, Don, just I think when you guys reported, just made some observation that the back end around holiday was stronger and then Oh,
I see, which I see, I see. So, holiday was stronger than fall. And so that's what we were really referring to in the futures the last futures window. This futures window is largely going to be the very tail end of holiday and spring and then the very beginning of summer. And one thing you got to bear in mind is the spring and summer particularly are affected by the World Cup comparison.
Okay. All right. That's helpful. And I guess my other question just has to do with when you guys think about the basketball business, you see the nice rebound in North America.
Just wondering, I think you made some comment, maybe you can clarify in
terms of what you're seeing on the I think you made some comment, maybe you can clarify in terms of what you're seeing on the backlog. I think you mentioned a double digit growth in the backlog trend. Just maybe talk about what's happening on basketball end of the business and sustainability there, how broad based it is, etcetera?
Yes, this is Charlie. The basketball business continues to actually gain momentum. I think a couple of the things that you've seen recently, the new Kobe shoe came out. We have the emerging talents of Kevin Durant, who is actually becoming a bigger and more effective, I guess, driver of the basketball business and then obviously LeBron and the Jordan brand. So, we're excited about that.
The apparel business in the basketball area is very strong and a lot of that is being driven by the Nike Pro position that we've taken in basketball. These are all North America data points. The other thing that we continue to see is a very, very strong appetite for both the sport and the product line in China, and we're starting to see an increasing interest coming out of Western and Central Europe, which has been a little bit of a nice surprise as we've continued to see basketball become more and more of global sport.
Okay. That's good to hear. Best of luck around the holidays and take care. Thank you. Great.
Thank you.
Thanks, Chris. Next question please.
Our next question comes from the line of Michael Binetti with UBS. Please proceed with your question.
Hey, guys. Congrats on a nice quarter. Thanks, Michael. Just up on an earlier question, where are the ASPs in the back half of the futures window versus the front half that you guys just reported, please?
Yes. I actually don't have that detail in front of me, Michael, and wouldn't provide that level of granularity either. I think it's not necessarily something that you should look at those small windows and believe there's something really that significant in it. Generally, on the footwear side, we're seeing the ASPs about even at this point.
But continued strong sell through and demand for the premium end of the price range as well. Okay. And I
asked mostly because there's obviously a lot of question about which brands have the ability to take price with all the inflation everybody's talking about, but I appreciate the color. So, I was a little bit surprised to see the ongoing gap between the futures and the prior quarter and the revenues in Western Europe. And we've definitely heard better things about Lunar and the free kind of catching on over there and taking off. I mean, is this as we look ahead to your revenue guidance for the rest of the year, should we be looking at Europe excluding FX as a low single digit growth vehicle or is am I wrong to be thinking about it that way?
No, I think you're in the right space. This is Charlie. I think one of the other things just to remember that the running number isn't quite as significant in Western Europe as a percent of total. And we're seeing it increasing, but it's a smaller piece of the business when you think about comparing it to something like North America.
I think just once again to bear in mind, World Cup is going to be fairly significant when you look at the futures for Western Europe. It's also very significant by the way for Central and Eastern Europe and emerging markets.
Our next question comes from the line of Jim Duffy from Stifel Nicolaus. Please proceed with your question.
Thanks. Good afternoon. Couple of questions on manufacturing and cost pressures. Can you talk about manufacturing capacity and the time frame for catching up with demand levels? Is that mostly a labor issue or do you need more capital investment in factory capacity from your partners?
It actually requires more production that requires capital investment and that's something that our partners are scaling up to do. The consolidation work that we did about a year ago has really given us a much stronger platform to grow from and those partners now are really working to scale up the business. How long it takes us to work our way through it is dependent on demand and the demand has been so strong that we're continuing to work on capacity. I see that makes sense. So labor hasn't been a gating factor then?
No. Production. Okay. And then Don, last question. You mentioned expectation for input cost pressures to ease over 12 to 18 months.
Can you talk about that in a little bit more detail? What are the cost components in particular that you expect to moderate? I guess airfreight for 1? Yes. And to be honest with you, one of the things I'm not holding myself out here to be commodities expert, but when we look at some of the key input costs for us, especially cut, I think that this past year has been the result of a number of factors.
I talked about the fact that when the recession hit and demand was down, a lot of supply came offline. And then we've had floods Pakistan and we've had a real explosion in demand. So the combination of those things meant we had a shortage and I think there's also speculation going on in that market. So, I think that as supply and demand come back into balance, we expect to see a break. I'm not sure I would advise you to be speculating in the commodities markets on that advice, but that would be our point of view at this point.
Our next question comes from the line of Robert Ohmes with Bank of America Merrill Lynch. Thank you. You may proceed.
Thanks. Afternoon guys.
Hi, Ronny.
Hey, two quick questions. In North America, if you look at the footwear business and I think Don you mentioned ASPs flatten out. Can you guys comment at all on the relative momentum by the premium channels where you're already strong. And the premium channels where you're already strong? And then the second question was going to be on sportswear.
Could you just remind us what the strategy is for the sportswear business and why it's down and then maybe contrast that with the Performance Apparel business? Thanks.
Yes, Ravi, this is Charlie. Let me talk about channels first. We don't really I think a lot of the time, a lot of the industry looks at the channels. We don't consider it the primary lens from which we look at the marketplace and the health of the marketplace. That being said, we feel very good about our position on in all the channels here in North America.
I think the ability to segment and position the product line appropriately for each and every one of the different distribution channels has been one of our strengths over a long period of time. I think and today, as you see the premium product performing well in some of the specialty channels and the brand being as strong as it is, you're going to see the same type of performance coming out of the family footwear channel, the distribution because of the alignment that we have in product and product type. So I don't have any of the specifics in front of me, but I would give you an overall perspective in that regard. And the second piece is on the sportswear piece. And I think it's one thing we've been focused on a lot around here over the last year is really positioning our sportswear business within each of the different categories.
We referenced
it the idea that we can
approach a consumer on the field of play in the gym as they train and then as part of their lifestyle is certainly an opportunity the destroyer jacket, I think the pants, the bottoms bar that we've developed in the women's business is really starting to establish itself. Examples like that, the Legende iconic pieces like the Tempo short in running and the basketball short are all solid foundational pieces that we've put in place around some of our sportswear business that we expect to continue to see to both expand and use as an efficient against SKU and style management and productivity.
Yes, I want to add to the quality of the sportswear business for NIKE is much improved. There's been a lot of work done on trying to edit the product line down and amplify the focus on the key styles, some of which Charlie mentioned. And so we're seeing some great results in terms of productivity per style and editing down the product line by 30% or more actually.
That's an apparel number that Mark shared by the way on the SKU management piece.
Is there a time where you're going to anniversary those adjustments and we start to see sports wear go positive
again? Well, I think I again, not to I'm not getting out any crystal ball that I shined up, but we feel very, very good about the position of where we are, both in footwear and apparel. I think one thing to keep in mind right now, our performance business is on fire. It's not obviously all used on the field of play. I think some of the running footwear that you see out there, the both the LUNAR and the DYNAMIC FIT product as well as the free product is taking away some of the numbers from our Sport style business, which we're happy to trade back and forth as consumer preference is move back and forth.
I think that's one of the big advantages of the Nike brand that we can capture that consumer as they do move back and forth, whether it's a retro style or a new innovative technology like the dynamic fit and lunar product that's out there today. So, we're we feel pretty good as far as where that business is and how it swings back and forth.
We are pulling back too on some of the demand on some of the key franchise items, particularly in footwear to make sure that we don't over saturate the market in some of those key styles. I think you're going to see some of that business really starting to pick up again sort of in the later part of this year into early 'twelve. But over the long term, we're very, very bullish on sportswear both in footwear and in apparel.
Got it. Hey, thanks a lot guys.
You bet. Thanks, Robbie.
Next question please.
Our next
still being a lever. But to clarify, have you guys already taken price increases for the back half window? And just given where we are in the year, do you still have flexibility to implement price increases at this point?
The pricing on the back half is pretty much locked in. We may have a little bit of flexibility in some of the in some of the at once business. But for the most part, most of that product, I guess, we would have a small amount maybe on the June May June futures time period where but most that is represented by the summer product line, which has already been locked in. We do look at pricing continuously and where we have increased demand or price value elasticity, we've always been very aggressive surgically taking advantage of those factors in the marketplace. Place.
But it is a market to market type situation. What may be working in the U. S. Right now doesn't necessarily work in China or Western or Eastern Europe. So, necessarily work in China or Western or Eastern Europe.
So it's an ongoing process for us. We feel actually very, very good about our ability to be both flexible and aggressive above where
you guys have been guiding in terms of growth. Can you just talk bit above where you guys have been guiding in terms of growth. Can you just talk about what drove that incremental growth? And presumably, it's somewhat of a timing shift given that the full year operating overhead guidance is still being maintained constant?
That's right. First of all, on a year over year basis, there are some timing issues and we've talked about stock options in the prior calls. We also had a fairly significant number of sales meetings during this particular quarter, which just was a different timing than last year. So if you looked at last year's phasing, Q2 was the lowest, one of the lowest quarters we've had and this year I think is more normalized. Okay, great.
And if I
can squeeze in one last one, can you just update us on where you stand on vendor consolidation in terms of how much you've accomplished this year and really where you expect to end up for the full year?
Yes. No, I think our consolidation is pretty much complete. I think we were trying to be we tried to execute that strategy relatively quickly. Right now, we're actually looking at capacity expansion with our current partners and how fast we can continue to ramp up against the demand that we're seeing. So, I wouldn't expect to see a whole lot more consolidation.
Perfect. Thank you very much and best of luck.
Thanks, Jason. Thank you.
Operator, we'll take one more question.
Our last question comes from the line of Omar Saad from Credit Suisse. Please proceed
I actually wanted to follow on Chi's question a little bit on the pricing side. Can you talk about some of the work that you've done on demand elasticity, especially in footwear, given your clear market leadership position, how sensitive is consumer demand to pricing when it comes to athletic footwear? Is it
to the very significantly globally?
And do you guys think about yourself and we're in a kind of an equation right now where the supply and the demand is obviously out of balance, more demand than supply. Do you guys consider yourself on the supply side? And if so and your suppliers are kind of seeing a natural lift in their pricing and their cost structure. Shouldn't that kind of flow through as if NIKE is indeed also part of the supply chain?
Yes. No, I mean, I think we would expect to see some price increases across the board. I think the I guess one of the competitive advantages that we do hold is our portfolio and our ability to manage that across both product types, geographies and categories. But there is a lot of sensitivity to style by style, market by market situations. And like I said, I'm both very confident and very proud of our ability manage that continuously.
I think we've done a great job of that over the years. I think we have a good process in place that allows us to take advantage of the opportunities when they exist and we'll continue to do so. As we said, we're looking at a very strong demand curve, some capacity issues and the ability to take up prices over time. But again, it will be on a surgical basis and you won't see a broad based application of demand, as you mentioned,
for some of the key iconic styles, whether it's demand as you mentioned for some of the key iconic styles whether it's some of the franchise styles that exist or the new technology like loaner or pro and products like that. So, there's definitely some opportunities out there and we'll be looking at taking advantage of those over the next 6 to 12 months.
Okay, thanks. That's helpful. And then last question, there might not be one single answer to this, but some of the regionally, some of the disconnects between the futures numbers that you're reporting and how kind of the sales are flowing through in the following couple of quarters? Central Eastern Europe, it seems like the futures look a little bit stronger than what the flow through has been versus emerging markets where you guys are just crushing it and futures numbers are great, but the actual revenue numbers you've been reporting are even stronger.
Hey, Tia. This is just the conversation we were having earlier. There are quite a few elements of our revenue equation that are not part of the futures model. In sales to our wholesale accounts, footwear and apparel futures are still the primary method by which we sell, but we are increasingly doing on the margin for wear and apparel at once. We've got a very rapidly growing direct to consumer business.
So that varies by geography. There are timing issues specific to geographies. For example, in the emerging world, you have a lot of protectionism. Sometimes it takes a while to get through customs. So, the issue I think of trying to match up futures for 1 quarter against revenue for 1 quarter that is not necessarily a productive exercise.
In the long term, futures are a great indicator of business momentum and trajectory.
Okay, great. So it's not necessarily futures are a better indicator in one region versus another region. It's more over the long term. It's a good indicator for kind of across the country.
I think using it more directionally is a better way to think about the futures numbers.
All right. Very good. Thanks. Happy holidays.
Thank you, everyone.
We'll talk to you next year. Bye.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.