Good afternoon, everyone. Welcome to NIKE's Fiscal 2011 First Quarter Conference Call. For those who need to reference today's press release, you'll find it at www.nikebiz.com. 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 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 ks, 10 ks 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. Business, including equipment, Nike Golf, Cole Hahn, 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 include discussion of non public financial and statistical information, which is also publicly available on that site, www.nikebiz. Com. I would now like to turn the call over to Kelly Hall, Senior Director, Investor Relations.
Thanks, operator. Hello, everyone, and thank you for joining us today to discuss NIKE's fiscal 2011 Q1 results. As the operator indicated, participants on
today's call may discuss non GAAP financial measures.
You will find the website, nikibiz.com. Joining us on today's call site, 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 our 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 others, please feel free to re queue and we will do our best to come back to you. Thanks for your cooperation on this. I will now turn the call over to NIKE, Inc.
President and CEO, Mark Parker.
Thanks, Kelly, and hello, everybody. In June, I talked about the momentum that we saw back in the back half of fiscal twenty ten and Q1 shows how we're expanding on that momentum. Revenue, portfolio of affiliate brands Converse, Hurley, Cohan, Nike Golf and Umbro continues to gain strong momentum. As a result, we delivered exceptional earnings per share of $1.14 to our investors. Our first quarter results are a great start to the year and demonstrate the tremendous growth potential of the NIKE, Inc.
Portfolio. Equally important is what's behind the numbers. And I point to 3 reasons for our outstanding performance flexibility, balance and alignment. Flexibility is about the power of our portfolio, our mix of brands and category offense. We're able to pull multiple levers many dimensions of our business.
For example, we can dial up the running category to leverage successful new designs like the Lunar Glide and Dynamic Stability. We can create momentum in action sports by combining 3 great brands across multiple sports in a single consumer experience. And in an environment where certain categories or geographies might be slower to recover, our diverse global portfolio allows us to create new growth in other key markets. This flexibility is strategic and powerful and unique to NIKE, Inc. Balance is all about leveraging innovation to create new opportunities.
We fixate on superior performance product and then use that innovation to drive the style side of the business, something you can see clearly in elevate our presence with our own retail partners. We take everything we know about the physical world of sports and we apply that knowledge to and bottom line growth. Finally, alignment, which is all about optimizing our resources to maximize return. When we're fully aligned across design, production, marketing and distribution, the result is experiences that only Nike can create, like our our happened in Q1. We see the same power of alignment throughout the company in design, our supply chain, in retail, in HR and operations, and in marketing and sales.
Alignment amplifies our resources to create unique and compelling successes for our consumers and shareholders. So the balance, flexibility and alignment So the balance, flexibility and alignment that contributed to Q1 continue to position us for growth globally and locally. But it's not just about NIKE, it's also about driving innovation and potential into the marketplace. We work with a diverse set of retailers, each with specific strengths and opportunities. And we're uniquely able to amplify those strengths in a way that creates a consistently authentic and provocative presence for our brands, categories and products.
When we combine that with our own retail executions in fronts. Even in a global market that still has some potential for turbulence, we're seeing evidence that our growth is accelerating. And our leadership position is helping to lift the entire industry. That energy in the marketplace also illustrates That energy in the marketplace also illustrates an appetite for sports, innovative products and a desire for personal connection with our brands that has never been stronger, which was why I'm optimistic now than I've ever been. It all starts and continues with deep and meaningful connections with athletes and consumers.
That's where the insights are, that's where the innovation begins and that's where our growth is. And ultimately, that's where we serve athletes, consumers and shareholders. Being flexible, balanced and aligned will also help us move through the continuing economic uncertainty ahead. Potential headwinds include all the usual suspects, raw materials, energy, labor and transportation costs, and FX rates, all of which have the potential to create pressure on margins through the back half of this fiscal year.
To this point, I think
we have proven our unique ability to manage through such circumstances. We have the scale and leverage to optimize our input costs. We have the ability to dial up discrete parts of the portfolio as opportunity arises. We have the capital to surgically and aggressively invest in new growth. We have the talent throughout the company to execute with speed and precision.
And just as important, we're obsessed. Have the hunger to seek and develop the new ideas and inspiration that allow us to innovate and ultimately surprise and delight the athletes and consumers we're here to serve. That's why we're not guided by the vagaries of the macro economy. We're guided by our own potential and that potential has never been greater. Now, here's Charlie to take you through some more details on the NIKE brand.
Thanks, Mark.
Good afternoon, everyone. Q1 was indeed a good quarter for the NIKE brand. We posted some strong numbers and we're in good position to advantage of the momentum we've worked hard to create. Let's go through some of the Q1 highlights. Reported revenue was up 6% to $4,500,000,000 SG and A was up due to demand creation behind World Cup and the World Basketball Festival.
And our global futures are up 10% or 13% on a constant dollar basis, our highest in over a decade. This may not be the last time you hear that today. We feel great about where we are and what we've accomplished, but I'm even more excited about where the NIKE brand can go. For the past year, you've heard us talk about amplifying our innovation agenda and the power of sport through a category lens. In fact, 9 months ago on our Q2 call, we laid out specific plans to pick up share and expand our leadership position across the industry worldwide.
Fresh air in the spring to drive sportswear, industry leading football innovations around World Cup, running strength driven by Lunar Glide and dynamic stability and the evolution of Pro Combat Apparel. All of these category specific efforts are paying off big time, just like we said they would. If we take a bit deeper dive into some of the examples Mark opened with, you can see how we use that category lens to drive innovation across products, brands and at retail. In June, we had our best World Cup effort ever. We broke new ground with a revolutionary traction technology and in high performance apparel with kits that were also our most sustainable ever.
And whether you are 100 rows up in Soccer City Stadium or 10000 miles away in your living room, there was no mistaking the iconic orange pop of the Nike boots on the pitch. Our Right to Future football content was viewed more than 52,000,000 times online, and it was Andres Iniesta in a Nike boot who kicked the winning goal for Spain in the final. I'm proud of both our brand and our commercial success at World Cup 2010. It was a championship performance, and we're looking forward to winning again in Brazil in 2014. After the World Cup, it was on to the U.
S. Open of Surfing. More than 600,000 people stormed Huntington Beach to watch Brett Simpson and Carissa Moore take the crowns. It was a massive celebration of surf, skate and BMX created by the leaders in action sports, Nike 6.0, Hurley and Converse. Then we put together the 1st World Basketball Festival.
It was a 4 day citywide celebration to honor the global game and a tremendous showcase for NIKE Basketball, Jordan and Converse. I was especially inspired by Kevin Durant, whose play and leadership earned him the MVP of the World Championships and established himself as an emerging force in the game going forward. As much as we highlight connecting with consumers at big events with millions of people, we're equally focused on the individual athlete. Just a couple of weeks ago, we launched our Nike Plus GPS app. It helps train, inspire and connect runners to the rest of the world anytime and anywhere.
It's very exciting example of how we can combine 2 high performance businesses, digital sport and running to create a new experience for consumers and a new growth market for the Nike brand. While I'm on running real quick on the Lunar Glide shoe. We sold more Lunar Glide shoes in Q1 than we did any other performance shoe in any quarter in our history. It's also proving to be a powerful crossover shoe between technical performance and style, again an opportunity we started talking about a few years ago and a perfect example of how performance product can drive both sides of the business. So World Cup, U.
S. Open a Surf, World Basketball Festival, all featuring new products and stories, new communities, compelling experiences with our brands and inside our stores and all in the last 90 days. So what's coming in the next 90 days? Well, we will launch new LeBron 8 shoe in October, a totally fresh expression of one of our most successful franchises, and we're putting the finishing touches on the highly anticipated Kobe set to launch on Christmas Day. In college football here in the States, tend to lead college teams are now playing in new pro combat uniforms and will be in lunar cushioning, dynamic stability, flywire technology and the tempo running short.
And that's just a glimpse of the product and the brand experiences on the way. That leaves the final piece of the category offense, optimizing the expansion of the marketplace. We lead with the NIKE Retail in store and online, and we drive innovation into the marketplace to help our retail partners present our brands and our products. 2 new NIKE stores in Santa Monica and a Roosevelt field are great examples of where we see the retail evolution headed, a balance of innovative product, strong brand and category passion. From the best performance product you can find anywhere to lifestyle footwear and apparel you can wear anytime.
Our partner retail concepts have that same balance. Foot Locker's House of Hoops, Finish Line's Running Lab, the DICK'S Field House concept have quickly become meaningful and measurable formats that expand the overall market. And with partners like JD Sports in the UK, Bell in China, Centaro in Brazil, we continue to deliver robust potential in key markets around the world. With one look at our futures, you can see the demand is high. This is a great position to be in, but it does come with its own challenges, specifically with select technical footwear and performance apparel products.
We're closely with all our manufacturing partners to accelerate production and meet demand on these highly sought after products. But all things being equal, we prefer a pull market, and we're seeing that enthusiasm play out across categories and geographies. In North America, the category offense is building strong momentum in products, brand experiences and premium distribution, with particular strength in our performance categories and in apparel. Futures for holiday and spring are up strong double digits in nearly every category, including women's training, which is steadily gaining share with its apparel business. And we expect women's training to see additional success and revenue when we introduce a major technology and performance story around Nike Free Footwear in the spring.
In Western Europe, we're pleased to see an accelerating return to growth as the region begins to show signs of stabilizing. We saw dramatic growth in running, football and action sports. In the UK specifically, we saw solid futures growth in basketball, football and men's and women's training. Central and Eastern Europe featured especially impressive comebacks in Russia and Turkey and strong in all categories. Still a lot of choppiness in that geography, but nice to welcome them back to the positive side of the growth equation.
In China, we extended market share gains driven by strong retail partner performance and strong double digit futures in nearly category. The big story there continues to be basketball, which shows no signs of slowing down. Covi is a living legend in China and its signature product continues to absolutely kill it at retail. China continues to be a market that offers a solid balance of short and long term growth potential. And in Japan, continues to work through one of the toughest economies in decades.
That said, our technical product in women's apparel is performing relatively well in that market. We'll continue to do in Japan what we've done with each of our businesses during the recession, run lean, invest wisely, optimize, drive profitability and maintain brand strength. And finally, the emerging 70%, which speaks to the power of the NIKE brand, and it speaks just as loudly to the potential of our emerging markets region, which has consistently posted double digit growth in revenue, futures and EBIT. So it was balanced alignment flexibility delivered our strong quarter. Our footwear business is solid around the world.
Our apparel business is energized and just beginning to reveal some of its true potential. And overall, we've never executed better on both the global and a local level. Going forward, we
have a clear vision and
a wealth of opportunity. And while we face you through a bit more of the numbers.
Thank you, Charlie. I agree there's a lot to like about our Q1 results. Revenues were up 10 percent in constant currency, reflecting growth in each of our NIKE brand sport categories, every geography but Japan and each of our affiliate businesses. And our NIKE brand direct to consumer businesses are on fire as our retail stores delivered record for the quarter and digital sales rose 22%. Future scheduled for delivery over the next 5 months grew 13 percent in constant dollars and 10% as reported, reflecting accelerating growth in the second half of the futures window.
Gross margin was surprisingly strong as higher input costs are hitting us a bit later than we expected and strong consumer In Q1, these positive factors more than outweighed FX headwinds, as well as higher sourcing and airfreight costs as we continue to work with our factories to build capacity and meet consumer demand. As planned, we made significant first quarter investments in demand creation and retail infrastructure. But our costs remain well controlled and stock option expenses declined, leaving overall SG and A lower than our expectations. The result was $1.14 in earnings per share, up 10% versus last year. As pleased as we are by our Q1 results, we're even more excited about the long term outlook for our business.
The broad based growth we've reported in Q1 and the rapid acceleration of futures are strong indicators that our integrated category offense is powerful traction in the marketplace. In recent quarters, we've said that while we're cautious about the macro outlook, we have great confidence in NIKE and we do still see some challenges ahead. Input costs are headed higher as labor, oil and cotton become more expensive. The rapid acceleration of our business will continue to increase sourcing and airfreight costs in the near term as we work to build capacity and meet surging demand. And we're facing tougher prior year revenue comparisons in the second half of the fiscal year.
Nevertheless, our first quarter results and futures give us even greater confidence in the effectiveness of our strategies and the strength of our brands, our business and our team. So now let's take a look at the Q1 results by segment. Revenue for North America increased 8% on both a reported and constant currency basis as direct to consumer sales increased 15% and wholesale revenue increased 7%. Comp store sales in NIKE owned retail stores increased 13% for the quarter, while online sales increased Constant currency futures for North America are up 14%, reflecting double digit growth in running, men's and women's training, football and action sports. In the Q1, apparel led the way in North America as currency neutral revenues increased 16%, reflecting 18% growth in full price sales and a decline in closeouts.
Futures for apparel increased over 20% as all increased 5%, driven by a 7% increase in full price sales, partially offset by a significant drop in off price revenues. Our Lunar and Nike Free. Basketball, football and men's training also delivered strong growth for the quarter. Footwear futures, excuse me, grew at a double digit rate reflecting tremendous strength in our performance categories. 1st quarter EBIT for North America improved 9% driven by revenue growth
and
and World Cup momentum, while apparel grew 3%, reflecting 5% growth in full price sales and Q1
EBIT for
Western Europe declined 3% Q1 EBIT for Western Europe declined 3% as we invested in World Cup marketing and currency headwinds put pressure on gross margins and real dollar profits. Central and Eastern Europe returned to growth in Q1 as revenue grew 3% on a reported basis 9% on a currency neutral basis. The constant currency growth was driven primarily by strong recoveries in Russia and Turkey, which both grew more constant currency futures grew 14%. As constant currency futures grew 14%. CEE declined 18%, also reflecting the impact of currency headwinds on margins and World Cup marketing initiatives.
In Greater China, 1st quarter revenue grew 11%, including one point of benefit from currency changes. Growth was fueled by expanding points of distribution and renewed brand momentum resulting from strong product offerings and exciting brand events, including grassroots tours by Kobe Bryant and Kevin Durant. Footwear and apparel each reported higher revenue for the quarter, driven by 23% with double digit growth in nearly every category. Q1 EBIT for Greater China increased 10% as revenue growth and higher gross margins more than offset increased investments in demand creation. In Japan, 1st quarter revenue declined 12% on a reported basis and 18% in constant dollars, reflecting off price sales over 50% below last year's levels.
EBIT declined 23% as lower revenues and higher SG and A were partially offset by stronger gross margins. While macro conditions in Japan remain weak, we're very confident we're taking the steps that will generate growth over time. We're also 30% and we continue to deliver healthy profitability and cash flow relative to the market. In Q1, our emerging markets geography continued to deliver impressive results. Revenue increased 30%, reflecting 24% growth on a constant dollar basis.
Excluding currency effects, most territories and categories grew double digits with Brazil and football leading the way. Across the emerging markets geography, football revenues continue to grow at a healthy double digit rate as a result of strong product, marketing and geography grew nearly 70% in Q1, driven by football and sportswear. This strong performance is the direct result of investments we're making to strengthen our position in this vital market as we look ahead to the 2014 World Cup and the 2016 Olympics. EBIT for the emerging 1st quarter revenue for our other businesses increased 15% on a reported basis and 16% on neutral basis, reflecting double digit growth at Converse, Hurley and Umbro and high single digit growth at Cole Haan and Nike Golf. EBIT for the other businesses grew 25%, reflecting revenue growth and strong gross margin expansion for most of the companies.
Our Q1 results and 5 month futures clearly indicate our business is rapidly building momentum with consumers and retailers, driven by our integrated category offense. While we do see some rough water ahead in the near term, expect FY 'eleven revenue growth at the top end of our high single digit target range. Consistent with the difference in futures, we expect reported revenue growth to be lower due to weaker foreign currencies versus last year. For Q2, we expect revenue growth below reported futures growth reflecting the timing of orders within the futures window. In Q1, gross margin exceeded our expectations as a result of the delayed impact of higher input costs, as well as the positive effect of strong demand and tight inventories.
Over the balance of the year, we still expect increasing pressure from FX headwinds, rising input costs and higher freight costs. As a result, we now expect full year FY 2011 gross margin about 50 basis points below FY 2010 with relatively flat margins in Q2 and more challenging comparisons in the second half as macro pressures increase and we begin to anniversary demand creation to grow at a mid single digit rate. We're planning
Q2 demand creation to grow at a low single digit
rate with spending below prior year in the second half as we compare against the heavy investments in the year, we expect operating overhead to grow at a mid single digit rate reflecting increased investment in our direct to consumer businesses balanced by increased efficiency in our core operating functions. We expect Q2 operating overhead to grow at a low double digit rate as a result of the timing of stock option income for each of the last three quarters of the fiscal year will be broadly consistent with Q4 of last year as the stronger dollar creates gains on our foreign currency hedges. And finally, we now expect our effective tax rate for FY 2011 to be about 26% as a greater proportion of our profitability is earned in the U. S. Where we face a higher tax rate than abroad.
We're very pleased with our first quarter results. And as we've said, even more excited about what they tell us about our future. We're now ready to take your questions.
Thank you. We will now be conducting Our first question is from Chi Lee with Morgan Stanley. Please go ahead with your question.
Hi, good afternoon guys. Congratulations. Thank
you. Thank you.
Don, question on the input costs, you mentioned several times that there were delays in those increases. Can you just elaborate on exactly what those delays are?
Sure. Well, as we've talked about before, we negotiate prices with our factories several seasons out.
And so as
a result, when commodity costs move, we usually see that impact flow into our products over a number of different over a number of seasons. And we expected those cost increases to hit us more heavily in the Q1 than they actually did. We still expect to see those increases in cost to some extent flow our cost structure over the rest of the year. But we did have actually a less significant impact in the Q1 than we originally expected.
And Don, was that just a function of the commodity cost environment primarily not necessarily coming through as much in the contracts that you originally thought?
It really has to do with the timing of product flow and when products are shipped and when they're produced in the factory. So it's really not an estimate of what the macroeconomic environment is going to do. It's really just the pace at which it flows through our numbers.
Okay, great.
And then just my second question for the North American futures being up 14%, can you just talk about are there any differences that you're seeing between some of the channels in your retail landscape, perhaps department stores versus athletic specialty? Are you seeing any differential in growth rates between those channels?
Yes, this is Charlie. I would say, I mean, it's all very, very positive. I mean, as we talked about the performance product is accelerated at a faster pace than the sportswear area. So the sports specialty channels and the athletic sporting goods channels are all doing extremely well. And when you look at some of the value chain and department store areas, those albeit still up.
And if they're more dependent on sportswear, may not be accelerating quite as fast.
I'll just add, this growth that we're seeing is really reflective of the strength of the categories, the channels that we do business in terms of the marketplace and the overall portfolio. So, this is some of the most balanced and complete growth that we've seen in quite a while. Great.
Thank you very much. Good luck.
Thanks. Next question please.
The next question is from Chris Vezio with Susquehanna Financial Group. Please go ahead with your question.
Good afternoon, everyone, and nice job on the quarter. I guess, one question, if you could just maybe elaborate on inventories in terms of how we should be looking at that? You guys done a nice job there. Any thoughts as we kind of progress forward? Obviously, business accelerating, features accelerating.
Is that start to, I guess, increase as we kind of move forward here?
Chris, this is Charlie. I think, again, I'm going to go back to a little bit what Mark just said. I think the with the balanced increase across the portfolio and our ability to continue to manage the supply chain top to bottom, whether it's the inventory of the retailer, the inventory of the wholesale, we've been we've continued to keep a pretty tight on things as this period of instability or whatever the macros are looking like and we will continue obviously, with the futures numbers, what they are, we feel very comfortable in the levels that they're at and our ability to manage the inventories over the next short and long term.
Okay. And then I guess, second question for you. Just I just want to go back to the gross margin thought process. I mean initially when you gave your fiscal year guidance, you talked about possibly 100 basis point decline in the gross margin and now it seems like down maybe 50 at most here. Given how the inventories positioned and I know there's headwinds in the business here on the product cost side.
I mean, could you maybe just put in buckets where your biggest concerns and maybe where the opportunities to outperform could potentially be whether the outperformance is just on the direct consumer business performing better or do you face more difficult comparisons there and that maybe gives you some concern or some reservation? I'm just trying to see the puts and takes on that margin.
Well, we always have goals that we set for ourselves in terms of improving margins. And over the long haul, as we've said, we do believe that we can continue to expand our margins. We have quite a initiatives in place in our product teams and category groups aimed at reducing product costs, at improving the efficiency of our supply chain. We have talked about the way we approach pricing on a very surgical basis. So we're always looking for opportunities in that space.
1st quarter. The a very pleasant upside in the Q1. The business there is quite strong and that has a very high margin compared to the wholesale business. And we also have been improving margins in our direct to consumer operations through better operations and better merchandising. So we always set ourselves some pretty aggressive goals on trying to expand margins over time.
And as Charlie referenced earlier, the quality of our inventory and the fact that we're so tight in the marketplace means that we're going to sell at top margins and low discounts. Having said that, that's really what's embedded in a lot of our results in the Q1 and we're going to continue to drive those over the balance of the year. I think the main story that I think is going to lead us to a little bit less favorable on the gross margin front is just that macro inflation that we think will start to flow through in the next three quarters.
Okay. And just I mean is it fair to say that things like freight, currency and labor in that order are the pressure points because you're flying in goods and how much does cotton have an impact to your thought process?
It's freight, currency, labor. There's is oil over time, we think is a factor, although oil has been relatively benign and then cotton is a relatively smaller factor than say labor or freight, but it's out
there. Okay. All right.
Put those assumptions into our expectations at this point.
The next question is from Kate with Citigroup. Please go ahead.
Hi, good afternoon. I was just wondering if you could tell us how the futures trended throughout the future period if they got better over time? And how much of the new concepts like Nike Fieldhouse, other Nike shop in shops and the opening of retail is figuring into your futures number for this quarter?
Well, with respect to the first question, the futures are a little stronger in the second second question was with regard to retail, fixturing and shop in shop programs?
Yes. And how much is contributing to futures?
Well, okay, this is Charlie. I think we continue to work with a lot of our key retailers around the world transitioning. I referenced a couple of them in my prepared remarks. Those programs are going I to what you're seeing with Dick's. And it's certainly part of the strategy as we move more of a dedicated category focus in the marketplace as well as aligned with the way we're organized in the company here and it's certainly what's driving it is our connection with the consumer.
Okay, great. And then if I could ask one more question about, you mentioned the Nike Free product and new technology, but I think you had said in your prepared comments that it was coming out in the spring and I had been under the impression that there was new Nike free product coming out in the fall. Has this changed or is this incremental to what's happening in the fall?
Yes. No, I'm sorry. What I mentioned what I was referring to was the spring will be a major campaign around NIKE free. But to your point, the new some of the new free product will you will see pre Christmas during the holiday timeframe.
Okay, great. Thank you.
And that technology by the way is continually evolving. So you'll see refinements to free technology in the second half of the year and then certainly as we move beyond.
Great. Next question please.
The next question is from Michelle Tan with Goldman Sachs. Please go ahead with your question.
Great. Thanks. I was wondering if you could help us beyond the macro inflation pressures that you're experiencing, help us think about how much of the freight pressure is coming from the need to airship some of these goods that have been in high demand and whether we could see that piece of it or should see that piece of it shrink throughout the balance of
year? Well, we're actually seeing both factors right now, Michelle. The freight rates are up fairly significantly year on year for both air and ocean. And we are doing more air freighting than what we have in the past. And I think given the strength of the futures book that we're seeing right now, I think it's going to be most of this year, we're going to see somewhat elevated levels of airfreight.
Okay, great. Thanks. And then just a follow-up on the SG and A side, the benefit of stock based compensation that you called out to the overhead this quarter, is there a lumpiness in that or is that something we should see continue through the balance of the year?
There is less lumpiness now than there was before. So where it was before was very much in the loaded in the Q1. It is now much smoother across the quarter. So what you will see from a year on year standpoint is a benefit in the Q1 and then higher expense year on year in the second, 3rd and 4th. And then as we go into fiscal 'twelve, it will smooth out.
The next question is from Bob Drbul with Barclays Capital. Your question.
Hi, good afternoon.
Hi, Bob.
Mark, I guess, when you look at the global futures numbers, the up 13%, the best in a decade, I think you guys might have said once or twice. When you look at the swoosh based recovery, where do you think we are today versus where you can go now?
Well, I still maintain that we're on a steady improvement. I'm quick to say, as I mentioned before, that there's still some instability in certain parts of the economy around the world. So we're not declaring a return to fully healthy economy by any stretch of the imagination. So we're looking at continued healthy recovery. I still contend of a slow, steady state of recovery.
I don't see dramatic shifts in that course at this stage and we're planning accordingly. We're have the flexibility to and the cash and the position to really deal with any further disruptions in the economic scene around the world. But I feel like we're in a good we're in a really good position. But I'm not going to change my position on the rate of recovery.
All right.
And I guess on another sort of bigger picture question would be, when you look at sort of the success of these numbers in the men's business, can you maybe elaborate a little bit more on sort of the plans around the women's business and sort of what has you most excited about the women's business today?
Yes, Bob, this is Charlie. I think there is that list is actually starting to expand regularly. I Right now, I think you've seen some of the new executions in store with apparel, women's apparel, specifically around the bottoms bar and the bra bars that we put into some of the new retail formats, that is performing extremely well and we're very excited and optimistic about the apparel side of the equation women's. And as I referenced a little bit earlier,
and I think we talked about it,
some of the new free products is coming into the market on holiday and will be highlighted in a major campaign around the free technology, which to Mark's earlier point continues to evolve for spring and that will bring a lot more attention to the women's business again. So we're pretty
we feel pretty good about
the women's business, both short term regarding the things that I just talked about and even more excited about it on a longer term basis, because we as we stated back New York in the spring, we believe that it's one of the big opportunities for the brand. Great.
Thank you very much.
Thanks, Bob. Next question please.
The next
quick question and then I wanted to ask a quick follow-up, if you don't mind. So just some quick back of the napkin math suggests almost half of the EBIT growth in the quarter was from the other businesses line. I was wondering if you could maybe give us a little bit more detail on what some of the big drivers in that business were as you think and maybe as you think about it through the year and then if I could ask a quick follow-up.
Yes. Other businesses, the other brands in the portfolio, very strong performance this quarter, pretty particularly with Converse, Hurley, Umbro, Cole Haan, I mean, we're seeing tremendous top line growth there as well. Great brand strength building, again, I think led by Converse. So, we're very happy with the strength of the portfolio. As I said earlier too, we're really learning how to actually integrate and leverage the brands more than ever before.
And that was evidenced this past 90 days with some of the events we talked about where we combined efforts Umbro and Nike at the World Cup, Hurley, Converse and Nike at the Action Sports event in Huntington Beach and then of course the basketball brand Nike, Jordan and Converse at the World Basketball Festival. And then behind the scenes, we're really leveraging our competencies and
functional excellence to really drive
But again, I think it's a combination of brand strength, strong product, in some cases some repositioning of the brands like Cole Haan for example, where we're contemporizing both the product and the brand presentation. So, feel very good about the individual brand efforts and then again how we're working collectively to really integrate the portfolio and leverage that.
Yes, I think too Michael just to clarify, one of the things that you should bear in mind here is the foreign exchange headwinds that we've been talking about really hit the Nike brand disproportionately. I think when you look at the math, North American business, for example, the Nike brand is up very strongly as are the emerging market profitability numbers. And what you got to bear in mind is lot of FX drag in the international Nike businesses, mostly affiliate businesses are U. S. Based.
The other issue is World Cup. There's a tremendous investment in the Q1 around World Cup that you didn't see as much of that on the affiliate side. So I think if you look at this over the course of the year, you're going to see a little bit more balanced growth. But having said that, as Mark indicated, the affiliates are doing phenomenally well.
Got it. And then just if I could ask a quick follow-up on China. It looks like there's been kind of an increasing divergence between the futures number and if you exclude currencies futures number and the revenues. So I'm just kind of curious if you could help us get maybe an updated idea of how much of the China business is done through the futures window? And should we be looking at the 63% futures there excluding currency?
And should we thinking maybe there's I guess, I'm just trying to think about how we should think about revenues into the next future into the next quarter since it came in a little bit below that 16 you guys had last quarter? Thanks.
Yes, this is Charlie. I'm not I have to go back and look at the numbers a little bit, but
I wouldn't expect to see I would expect
to see the futures number continue to be the leading indicator directionally for the China business. So as far as the divergence that you speak of, I'd have to go back and look at it quarter by quarter, but it should we shouldn't any dramatic changes in the way that that formula is working.
Yes. And I'd echo that point that our retail business in China is still relatively small. And so I do think as Charlie said, you'd expect to see futures to be a reasonable indicator directionally.
Any idea what percent of business there is done through the futures window?
You mean through the program, the futures? Yes.
We'd have to follow-up on that, I don't have a number handy.
All right. Thanks again, guys.
Thanks, Michael. Next question please.
The next question is from Jim Duffy with Stifel Nicolaus. Please go ahead with your question.
Thanks. Hello everyone and great quarter. Particularly nice to see the strength on the apparel side of the business. Can you provide any perspective on the profitability progress you're seeing in apparel and how long you think the runway is on that?
Well, I mean, I would say, Jim, that the profitability on the apparel side is broadly really seen the sportswear business move up the price scale. So, we're making great progress And then of course the last few comments I made about apparel in my prepared remarks, we're seeing great performance on the full price
apparel and a lot lower closeouts. Profitability
side progress on the profitability side on apparel. And I would just add
one more piece to Don's point.
And I think that and it goes back to what we've talked about over the past year is really repositioning the apparel business in a more premium way. And I think that does give us an opportunity both on the performance side of the business and in a premium brand position to go after some potential margin expansion in apparel.
Two other quick factors there you should be aware of is apparel is another example of the category offense really starting to click into gear here. Really seeing that result in better product, just managing the business better, reducing our style count and really focusing on style productivity. So really some basic elements of really running a successful apparel business. We're really starting to the category offense really help turbocharge all that effort.
Great. And then a second question regarding the balance of the futures across the futures window. Given the capacity challenges, do you think that retailers to any extent are pulling forward orders to ensure availability of key products? Is that something that's influencing the futures orders?
Well, I think that I think there may be a little bit of that, but it is sustaining itself. So we're seeing it pretty consistently all the way through the window. So to the fact of the matter is, if it is happening, then it's an ongoing practice that's being going on. That being said, I don't think we're I don't think it's a material amount in regard to the key products that we're talking about, because if we are up against any capacity constraints, we're allocating the products, the retailers are familiar with the program and it ensures both quality and on time delivery by doing that. So I think I don't think it's going to be a material effect on the window overall.
Okay. Certainly a high class problem to have demand exceeding supply.
Yes, it is. We like that.
Congratulations on the quarter.
Thank you.
Thank you. Next question please.
The next
question is from Omar Saad with Credit Suisse. Please go ahead
with your question.
Actually I have 2 questions. I want
to follow-up on Jim's last question about demand exceeding supply. Typically that price becomes a tool in those situations where the demand is stronger than supply. How do you think about using price as a tool given the environment that you're having to airfreight stuff over and chase capacity?
Well, I think something or
more that we talk about a lot is the price value relationship in the marketplace and continuing to operate both as on a premium brand position, but just as well-being very acutely aware of what that price value relationship with consumer is. So as we've continued to talk all along, we are always looking at surgical and strategic areas where we may have some elasticity in pricing and we will continue to do so throughout this time period. But I think we want to get too aggressive in this area right now with all the uncertainty that there is out there in the marketplace. So it's something that we look at every quarter as we take the lines to market and assess the overall price value relationship and compare it with the demand and try and make those decisions accordingly.
Okay, that's helpful. And then a follow-up on the SG A side, the SG and A control in the quarter actually looked quite excellent, especially given that it was a World Cup quarter. And then I even heard you talk about, it looks sounds like SG and A kind of demand creation and the overhead side growing in the mid single digits when your sales guidance is above that, so a little bit of leverage happening this year. Is this a function of the fact that there maybe aren't as many major sporting events this year to spur demand creation or is this an ancillary benefit of kind of the reorganization around categories that maybe allows you to lever SG and A?
Well, I think it's a little bit of both to your point. Obviously, without the events during the year, it does give us the ability to take a breath, step back and evaluate where we are from a brand standpoint. But overall, I think it's going to be a little bit of both.
Okay. And just a reminder, the next major event is with the London Olympics?
2012.
Yes. I think the one thing I'd also keep in mind though, Omar, is there is a linkage here between the amounts we invest in the brand and driving the top line at the risk of stating the obvious. And the premium get the product right, that we connect the brand and that we are distributing in a premium way through that category lens. That really is clicking through.
We've made that investment.
We're going to continue to make those investments. They're paying off. They're generating the top line growth and
the profitability. It's also a
question of how the categories are working with the geographies, which is really the principle behind the restructuring that we did a couple of years ago. So we're seeing a much tighter relationship I think between the categories and geographies and a much more surgical focus on really getting behind the opportunities that are going to give us the best return. So I think that's a big part of that picture.
Thanks for that. Great execution, guys.
Thank you.
Operator, we have time for one more question.
Our next question is from Robbie Ohmes with Bank of America. Please go ahead with your question.
Thanks. Just very quick follow ups. The first one, just the China backlog up 23% constant currency. Any sense you can give us on how much of that is a sort of same store sales reacceleration of the existing base? Or are you reaccelerating your licensed stores over there?
And the other question was just on your comps, your 13% comp that you guys talked about on the call. A lot of other people out there saw, I think even some of your customers saw same store sales decelerate in that timeframe that sort of June, July, August timeframe. So can you give us a sense whether your flagships did terrific or your outlets comped great or U. S. Comps versus Europe, etcetera, would be really helpful, I think, to all of us?
Thanks.
Rod, it's Charlie. I'll take the first part. I think the China piece, we have not accelerated or reaccelerated our store expansion. We continue to move into the 2nd, 3rd, 4th, 5th tier markets at a relatively conservative rate as we talked about in the last couple of calls. That being said, I think you're seeing the business acceleration on a store per store basis as we see ourselves that's what you're looking at.
And I mentioned, I think a little bit in the prepared remarks, the categories that are really driving that are basketball running and Nike sportswear in China. Those three categories continue to see a very strong growth curve.
And with respect to retail, Robbie, both the outlet stores and the inline stores were comped they comped up strongly, both of them did.
And U. S. Versus Europe?
U. S. Definitely both comped up and just quickly looking at Europe. Europe were both the inline stores were about flat and the outlets comped up a bit. So North America, both were up double digits, in Europe both about flat with the outlets doing a little better.
Yes, a big part of the in line number was affected by the London. We actually had some problems in London with the floor. So one of the floors. So I would that might have affected the inline stores in Europe a little bit.
Got it. Thank you. Thank you very much for that.
Great. Thank you, everyone. We'll talk to you
next time. This concludes today's teleconference. You may disconnect your lines at this time.