Welcome to NIKE's Fiscal 20 10 First Quarter Conference Call. Leading today's call is Kelly Hall, Senior Director of 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 NetOne's 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. In business including equipment, NIKE Golf, Cole Haan, Converse, Hurley and Umbro are not included in these future numbers. Finally, participants may discuss non GAAP financial measures.
The presentation of comparable GAAP measures and quantitative reconciliations are found at NIKE's website. This call might also include discussion of non public financial and statistical information, which is also publicly available on that site, www.nikebiz.com. Now, I'd like to turn the call over to Ms. Kelly Hall, Senior Director of Investor Relations.
Thank you, operator. Hello, everyone, and thanks for joining us today to discuss NIKE's fiscal 20 10 Q4 and full year 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 or 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 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 by the way, welcome to your first earnings call. It's great to have Kelly at the table in her new role as leader of the Investor Relations team. I want to start by saying how, first of all, very pleased and proud I am of our performance and our team over the past year and the most recent quarter. I'm also very happy by the way about today's World Cup results. Great wins by USA and England joining Brazil, Holland and South Korea as those already through to the next round.
So it should be a very exciting weekend ahead. A year ago, on our Q4 call, I said NIKE was not a wait and see company. That would have been easy strategy to adopt. In fact, a lot of companies chose that path, but I had tremendous confidence in our strategy and the competitive fire of our management team. We weren't about to let our core strength sit idle.
Its innovation and inspiration are not tactics at NIKE, they're a way of life. And because we stayed on the offense, we were able to deliver a very strong year in a tough global economy. We did it while increasing momentum for the business throughout the year. So how do we do it? Building on the success of our category offense, we decided to reengineer the company to expand the influence of our brands and people and to leverage our operational excellence across the portfolio.
It was the right thing to do. We energized our key markets with the most innovative product that we've ever produced. Before its deeper and more productive relationships with our consumers. Our retail and apparel businesses are starting to deliver on their true potential as 2 of our biggest growth opportunities. And we continue to increase our brand strength and competitive separation.
And we're stronger financially than we've ever been before. Our revenue at $19,000,000,000 is down 1% from last year, but we've never been more profitable. EPS and futures are up, inventories are down. Our affiliate brands, Cohan Converse, Hurley, Nike Golf and Umbro contributed more than $2,000,000,000 in revenue, an increase of 5% over last year, and that's a record. Revenue from direct to consumer, our NIKE owned stores and online business increased 12% to nearly $2,500,000,000 and that's a record.
Gross margins came in at 46.3% for the year, That's a record. And we generated $2,800,000,000 in free cash flow from operations and now have over 5,000,000,000 dollars in cash and short term investments on our balance sheet. Yes, those are 2 more records. What those full year numbers don't show is that tremendous momentum I mentioned that we generated in the back half of fiscal twenty ten. In most key markets around the world, our business has strengthened while our major competitors weakened, and that's a trend we intend to accelerate.
That momentum helps us remain highly opportunistic across all of our categories and markets. And I want to be really clear on that point. Our focus on new growth does nothing to minimize our attention or investment in the NIKE brand and the huge upside we see in both developed and developing categories and markets. Quite the opposite effect, our innovative products, brand strength and premium distribution are what drive the entire portfolio. I think we have a great example of leveraging those strengths happening right now in football.
Recently, as I was at the Champions League finals in Madrid, and I just returned from the World Cup, both phenomenal events to capture the attention and passion of sports fans throughout the world. Nike's presence in global football is truly inspiring. Our success in football shows that strong competition makes us better. In fact, we thrive on it. It's driven us to be the biggest and best in the industry.
Revenue in NIKE, Inc. Football was up 39% in Q4 alone and that's before the first goal was scored at the
World Cup.
When you watch a World Cup match, whether you're inside the stadium or in front of your TV, you can't help but notice the bright orange and purple signature of our boots on the pitch. We developed 4 distinct silos of performance footwear, our lightest ever and made them all the same vibrant color scheme, unheard of until now. And that iconic product is just the very tip of the complete offense for World Cup we call Right the Future. It's the most creative, complete and integrated campaign we've ever done. Everything is in play.
We've got game changing product, athletes and teams, an online community that numbers in the tens of 1,000,000 and more excitement on the ground than anybody else in the game. And that kind of complete offense is driving record growth and leadership for our football business. We're starting to execute at a similar level in the retail side of the business. We did it with Nike owned retail stores in Harjuku in Beijing. We did it with our multi branded action sports stores in Southern California.
We did it with partners in category destinations like House of Hoops at Foot Locker, the Fieldhouse at DICK'S and the Running Lab at Finish Line. And we did it online where we saw record growth to over $260,000,000 in revenue, which is up 25% for the year. And that includes NIKE ID, our online custom design app, which surpassed $100,000,000 for the first time. But as we've said before, we're not interested in any kind of growth, just the good kind. And we put a lot of focus on fine tuning our operational excellence.
We expanded our focus on lead manufacturing and footwear and apparel. We consolidated our factory base of partners. We further streamlined our supply chain with a new distribution center in Memphis and another DC targeted to open in just a few months in China. In short, we delivered a solid year in some very tough conditions, and I'm proud of the work we did in fiscal 2010. And now we move into the new fiscal year.
Nobody is out of the woods yet. We're sure to face more challenges as unemployment, input costs, growing currency and market volatility play themselves out. We can't control the global economy, but as we've demonstrated time and time again, the things we can control will continue to serve us, just as they did in fiscal 2010. The NIKE brand will always be our greatest competitive advantage. It's the source of our most advanced R and D.
It delivers insight and scale and leverage to every NIKE, Inc. Brand and business. It's the source of our culture and personality that connects so strongly with consumers around the world. The NIKE brand is a source of instant credibility and opportunity that we never take for granted. I've made it clear to our leadership team that we will not leave any key growth opportunities untapped.
China is a great example. We're leading we are the leading force in this incredible market and we'll leverage that position to our current market revenue of $1,700,000,000 and that's just for the NIKE brand. Action Sports is our fastest growing category and we have 3 brands that speak straight to the heart of that consumer, NIKE, Converse and Hurley. And we'll continue to engage and connect with our consumers through categories, through products and the stores that the consumers visit and the communities where they live. When we stay connected to consumers and focus on our key growth opportunities, I'm confident we'll manage through the uncertainties of the global economy to deliver continued momentum in another strong year.
I have to add more than 30 years ago when I first started designing NIKE shoes, people would ask me what more can you do to a shoe that hasn't already been done. And I have to say, I don't hear that question as often today. That's the power of innovation. I've never been or seen more open space to create radical new technologies and breakthrough concepts as I do today. It's in products, but also in retail and communication and manufacturing.
It's never really been about only one shoe or one technology. Our potential is the same as the dreams of young athletes all over
the world,
infinite. With that, I want to thank you and hand it over to Charlie. Thanks, Mark.
This time last year, we said we'd focus on 3 things.
We said we continue to invest in
the NIKE brand to take advantage of opportunities in this tough global economy. Balance costs, revenue and investments to remain financially strong and expand competitive separation by leveraging our innovative product brand strength and premium distribution.
So that's exactly what
we were able to do. On the year, reported revenue for the NIKE brand was down 1% to $16,500,000,000 but EBIT was up 1% to $3,100,000,000 Revenue from NIKE owned retail increased 12%, driven by strong growth in stores and digital. We added 140 basis points to gross margin, driven by clean inventories and less discounted products. We optimized SG and A, leveraging our wholesale operations to drive investments in demand creation and owned retail. And we saw great progress in our apparel business, which saw a 13% rise in revenue in the 4th quarter,
a
part of the story that the full year numbers don't show is the growing momentum we achieved in the second half. We entered the new fiscal year with clean inventories, accelerating category performance and tremendous energy in our key markets. I want to shine a light on our 3 core competencies for a minute, innovative product, brand strength and premium distribution. And I guess today it's only appropriate that we do it through the category lens of soccer or football. Mark mentioned the incredible pop we're getting with our boots on the pitch.
What he didn't mention is that nearly half of the players in the tournament are wearing them, almost 50% more than our nearest competitor. And like the boots, our team kits are the lightest and most sustainable we've ever designed. We're able to create the kind of innovation or relevance on the pitch in our training product and into the lifestyle side of our football But we don't stop at product. We continually build and leverage our brand strength with a multidimensional approach. That's how we build communities, how we tell the stories.
In fiscal 2010, we launched Lace Up Save Lives, part of our ongoing commitment to fight HIV AIDS in Africa. We just opened a football training center in Soweto in South Africa
that will help 20,000 kids
a year long after the World Cup is gone. And we created tremendous excitement and awareness with the Right to the Future campaign online, on the ground in South Africa and on television around the world. The recognition and awareness has exceeded even our high expectations. None of this would be possible without the power of the NIKE brand. It's our promise and our proof to consumers that we understand and that we share their passion.
Our 3rd competitive advantage after the innovative product and brand strength is what we call premium distribution. From London to Paris, Berlin, New York and Milan, the Nike Boot Room how consumers engage with NIKE Football at retail. It's the most compelling expression of football performance, passion and culture anywhere on the planet. It's a destination and an inspiration for footballers around the world, and we're sharing and scaling the boot room concept with our wholesale partners in hundreds of locations. This has all led to some very impressive results.
Our 4th quarter football business was up nearly 40% and our futures are up strong double digits through the holiday time period, indicating a strong momentum well past the World Cup event. That same focus on product brand and distribution drives every category and running products like the Lunar Glide shoe and the dynamic support technology continue to validate our position as the sports leading innovator. Brand experiences like the human race at nikieplus.com are helping to grow the sport of running globally, And we're leveraging the success of the running floor in Niketown, New York and our new Nike running experience in Palo Alto to bring inspiration to a new concept called the Running Lab with our U. S. Partner, The Finish Line.
Basketball, same thing. Innovative product, brand strength and premium distribution. Let me focus on just the brand strength piece for now. In August, we'll kick off the 1st World Basketball Festival in New York City, the basketball capital of the world. It's a 4 day celebration of the global game.
We have national teams from the U. S, France, Brazil, Puerto Rico and China coming to the epicenter of basketball in preparation for the world championships. We have local legends and cultural icons to entertain fans from Times Square to Madison Square Garden to Record Park. And flanking the power of the Nike brand will be innovative product to consumer experiences from Converse and the Jordan brand. We're also building out new retail experiences both in store and online.
It's example of starting to leverage the Inc. Portfolio, something only NIKE can do. That's how we bring categories to life and it's an incredibly powerful source of separation for NIKE. Another great example of this will take place just a week prior on the West Coast at Surfing's U. S.
Open in Huntington Beach, where Nike Converse and Hurley will take center stage. Our category offense is clearly a competitive advantage in understanding our consumers delivering innovative products and experiences. And that's starting to reignite our training business as well in both men's and women's categories. Our Pro Combat First Layer product was up 50% for Q4 and half of that were bought by women. Our innovation in the women's training footwear segment is being received very well with the introduction of the women's trainer 1, driving strong double digit increases in futures for North America in both footwear and apparel for holiday.
To get the full picture, however, we also have to look at the consumer through a geography lens, where they live, play and compete and how they express themselves in their own unique cultures. Having finished our 1st year under the realigned 6 geography structure, the deeper focus is delivering positive trends in both developed and developing markets around the world. In North America, it continues to be a source of resilience and opportunity. Revenue was down 1% for the year, but the geography returned to growth in the second half and grew full year EBIT by 8%, a clear indicator of managing the business well. Both of our European geographies saw improving revenue trends for the second half of the year and have positive futures.
So some stabilization happening here. In China, our business is accelerating. While flat for the full year, 4th quarter sales were up 12%, full year EBIT was up 11% and futures are up 6% as we continue to gain share. Japan remains a very tough market. Revenues were down 5% for the year in a very challenging environment.
We expect that market to remain challenging for at least the rest of calendar 2010. And finally, our emerging markets. I'm very pleased with our performance here. These markets had a relatively shallow dip and a rapid recovery from the global economic downturn. Consumers have tremendous enthusiasm for NIKE products, our brand and our retail experiences and the numbers prove that to be true.
Revenue was up 40 7% on the quarter 20% on the year, very strong performances there. And when you consider that 40% of the world's population lives in this geography, along with a large portion of the growing middle class, it's easy to see a huge upside for the NIKE brand.
So going forward, we'll continue to leverage
the momentum we created, especially over those last two quarters. More innovative product inspired by athletes and consumers, more energy around sports by leveraging the power of the NIKE brand and more amazing experiences in store and online in every key market around the world. Trust me, it only sounds easy, but we have the talent and the teams who are looking forward to it. So I'll turn it over to Don and thank everybody for listening.
Thanks, Charlie. Since the beginning of the financial crisis, our intention has been to deliver appropriate financial performance while extending our market leadership and positioning ourselves for sustainable profitable growth over the long term. By leveraging the strength of our brands and maintaining financial discipline, we believe we can emerge from the downturn a stronger more profitable company. Despite the high level of macroeconomic uncertainty, we assured you we'd remain agile to minimize downside risk while aggressively pursuing upside opportunities as they arose. In fiscal 2010, we did what we promised.
By leveraging the strength of our brands and maintaining marketplace discipline, we held our revenue essentially flat year on year. We delivered record gross margins, EPS and cash flow and built the strongest balance sheet we've ever had. At the same time, we created greater competitive separation in the marketplace and positioned ourselves for sustainable profitable growth. With few exceptions, our businesses returned to growth in recent quarters and are now accelerating into fiscal 2011. That isn't to say the macroeconomic uncertainty is over.
We're certainly aware of the risks presented by high unemployment and extreme volatility in the commodity, currency and equity markets. But we're also confident in our ability to deliver consistent results by staying focused on our business strategies and remaining nimble as we implement them. Our results for fiscal 2010 reinforce that confidence. Q4 revenues were $5,100,000,000 up 8% versus the prior year. On a currency neutral basis, revenues grew 4%.
Excluding currency changes, revenues grew 3% for the Nike brand and 6% for our other businesses, which include Cole Haan, Converse, Hurley, Nike Golf and Umbro. For the year, Nike Inc. Revenues were $19,000,000,000 1% below last year on a reported basis and down 2% on a constant dollar basis. Revenues for the NIKE brand were down 2% for the year on a currency neutral basis, reflecting mid single digit Football and basketball grew at a low single digit rate, while action sports delivered high teens revenue growth. NIKE brand futures for June through November increased 10% on a currency neutral basis as all 7 key categories and every geography except Japan were higher.
On a reported basis, futures grew 7% primarily reflecting weaker currencies in Europe. Diluted earnings per share for Q4 grew 51% to 1.06 dollars bringing full year EPS to $3.86 up 27% versus fiscal 2,009. As you know, we reported changes charges in fiscal 2,009 for the impairment of Umbro assets and the restructuring of our organization. Adjusted for these non comparable charges, EPS grew 7% for the 4th quarter and 1% for the full year. You'll find a reconciliation of these pro form a EPS growth figures in our press release and on our website, thank youbiz.com.
Gross margin reached record highs for both the 4th quarter and the full year at 47.4% and 46.3% respectively. 4th quarter gross margin was 4 points higher than the prior year, reflecting higher margins for both the NIKE brand and our other businesses. The growth in NIKE brand gross margin was driven by favorable product mix, cost reduction initiatives and lower input costs, as well as the positive impact of clean inventories on off price volumes and discounts. Sales growth and stronger profitability in our direct to consumer operations also had a positive impact on NIKE brand gross margins. 4th quarter SG and A rose 25% on a reported basis and 21% on a constant currency basis, driven by the comparison of this year's demand creation investment in World Cup marketing compared to unusually low spending in last year's Q4.
Operating overhead grew 13% in constant dollars, reflecting investments in direct to consumer operations and performance based compensation as well as the timing of T and E. For the year, currency neutral SG and A increased 2%. Net interest expense in the 4th quarter was flat year on year. For the full year, net interest swung from $9,000,000 of income last year to $6,000,000 of expense this year driven by lower rates of return on investments. Other income for Q4 was comprised largely of gains on currency hedges.
We estimate the changes in rates used to translate our foreign currency profits combined with the currency gains included in other income increased year over year pre tax income by $28,000,000 in the 4th quarter $34,000,000 for the full fiscal year. Our effective tax rate for the quarter was 23.6 percent, a 6 20 basis point improvement over last year's Q4, while the full year rate was 24.2%, twenty basis points higher than last year. Both the 4th quarter and full year rates benefited from improved tax rates for our international businesses, which are generally taxed rates lower than the U. S. Statutory rate.
However, the full year comparison was less favorable since we recorded a significant tax benefit from the Umbro impairment in the Q3 of fiscal 2 2,009. Our financial model has consistently emphasized both profitable growth and capital efficiency. That's why we're also pleased by the growth in our cash flow and our expanding return on invested capital. In FY 'ten, we delivered $2,800,000,000 of free cash flow from operations, a $1,600,000,000 increase over the prior year and we raised our return on invested capital by 290 basis points to 20.7%. Strong working capital management was the key driver, reflecting our intense focus accounts receivable and inventory.
As of May 31, accounts receivable were 8% below prior year levels and inventories were down 13%. By tightly managing the inventory in our supply chain and working with our retail partners to keep sales channels clean, we're maintaining the strength of our brands and maximizing profitability both for NIKE and our retail partners. Now let's take a look at results for the quarter by geography. In North America, Q4 revenue increased 4%, including a 1% currency benefit. Direct consumer revenues increased 19% as online sales increased 27% and comp store sales for NIKE owned retail stores increased 17% driven by higher traffic, conversion and average dollars per transaction.
Wholesale revenues increased 2%, driven primarily by renewed strength in apparel, which grew double digits. 6 month futures for North America grew 7% in constant dollars. In the 4th quarter, footwear revenue in North America increased 1% on a currency neutral basis, driven by 2% increase in inline sales, partially offset by a 27% drop in off price revenues. The in line revenue improvement was primarily due to double digit growth in running, football and men's training as most other categories were down single digits. The acceleration of the running category has been particularly rapid as product innovations such as Lunar Lawn and Free fuel consumer and retailer excitement.
Apparel continued to gain momentum in North America reflecting the hard work we've done over the last 2 years to position this business for profitable growth. On a currency neutral basis, Q4 apparel revenue grew 12% as in line revenue grew nearly 30%, while closeout revenues declined over 50%. Futures for the next 6 months grew at a mid teens rate as all 7 key categories trended higher. 4th quarter EBIT for North America improved 8% as higher gross margins more than offset increased investment in demand creation. In Western Europe, Q4 revenue increased 2% on a reported basis, but declined 2% excluding currency effects.
On a constant dollar basis, footwear was down 4%, while apparel grew 3% driven by the impact of the World Cup on the football category. Currency neutral futures grew 11% powered by strong growth across multiple categories. Q4 EBIT for Western Europe fell 17% as higher investments in demand creation more than offset higher revenues and higher gross margins. In Central and Eastern Europe, 4th quarter revenue increased 9% on a reported basis, but declined 3% excluding currency effects. We're beginning to see signs of stabilization in these markets a result of improving macroeconomic conditions, increasing brand momentum and tight management of inventory in the market.
This is starting to translate into growth in futures, which are up 3% over the prior year on a constant currency basis. Q4 EBIT for Central and Eastern Europe declined 9% as revenue growth was more than offset by lower gross margins and higher demand creation investments behind the World Cup. In Greater China, 4th quarter revenue grew 12% on both a reported and currency neutral basis, driven by new points of distribution and comp store revenue growth. All three product types reported double digit revenue growth, while robust expansion of sportswear, football and action sports fueled the growth from a category perspective. Current constant currency futures orders for the next 6 months grew 16% over the prior year.
Q4 EBIT for Greater China increased 20% as revenue growth and higher gross margins more than offset increased demand creation investments. In the Q4, revenue for Japan declined 8% on a reported basis and 12% in constant dollars. EBIT declined 6% as lower revenues and higher SG and A were partially offset by improved gross margins. Although macroeconomic conditions in Japan remain weak, we're taking the same approach there as we have around the world for the last 18 months, delivering appropriate financial performance while creating competitive separation in the marketplace and positioning ourselves for sustainable profitable growth over the long term. In Japan, we continue to deliver innovative product, drive deep consumer connections and evolve the marketplace by building category destinations with key retail partners and in our own stores.
As a result, our gross margins are up significantly, both inventories and accounts receivable are in great shape and were much healthier than our competitors in Japan. In Q4, our emerging markets geography delivered another outstanding quarter. Revenue increased 47% on a reported basis and 28% on a constant dollar basis. Excluding currency effects, nearly every territory and category grew double digits with Brazil and football leading the way. Revenues in Brazil grew 74% in Q4 driven by football, athletic training, sportswear and action sports.
Across the geography, football revenues grew over 60% as a result of strong product, brand and retail execution around the World Cup. EBIT for the emerging markets increased 46% in the 4th quarter. Q4 revenue for the businesses reported as other increased 9% on a reported basis and 6% excluding currency effects. EBIT was 71% higher than the prior year quarter reflecting strong gross margin expansion. Converse delivered solid results in fiscal 2010 as revenues grew 4% in Q4 bringing full year revenues to $983,000,000 up 7%.
Hurley delivered 9% growth for the year to reach revenues of $221,000,000 and Umbro reported the strongest finish to the year as 4th quarter revenues grew 57% bringing full year revenues to $224,000,000 up 29%. Both NIKE Golf and Cole Haan struggled in the first half of the year, but returned to growth in the second half. Revenues for both NIKE Golf and Cole Haan declined 2% for the year to reach $638,000,000 for Nike Golf and $464,000,000 for Cole Haan. Our Q4 results and 6 month futures clearly indicate that our business is rapidly building momentum with consumers and retailers. That momentum is fueled by innovative product, strong brand connections and exciting retail presentation, factors we believe can drive sustainable profitable growth over the long term.
That said, currency changes and input cost inflation will put significant pressure on our reported top and bottom line results for fiscal 2011. On a currency neutral basis, we expect fiscal 2011 revenue to grow at a high single digit rate with low double digit growth for Q1. Consistent with our reported futures, we expect currency headwinds will reduce reported revenue growth for both the Q1 and the full year. We expect that gross margins will also feel the impact of macroeconomic headwinds in fiscal 2011. The stronger dollar and rising costs for product components such as oil, labor and freight will put significant pressure on gross margins.
We also anticipate higher costs for airfreight as we work with our suppliers to meet the tremendous growth in orders for running products we've seen for the fall and holiday seasons. While these headwinds will be partially offset by our ongoing gross margin improvement initiatives, we expect fiscal 2011 gross margins could be as much as a point below fiscal 2010 with as much as a half point of decline in Q1. Our relationship with the consumer is the key to our business success and we'll continue to strengthen those connections by investing in our brands. For the year, we expect demand creation to grow slightly slower than revenue with spending weighted toward Q1 in support of key events such as and the World Basketball Festival in New York City. Mark likes to say that our opportunities are unlimited, but our resources are not.
That means we'll continue to focus our resources on investments intended to drive sustainable profitable growth. In fiscal 2011, we expect operating overhead to grow at a mid single digit rate. This overall total will reflect increased investment in direct to consumer operations and capabilities balanced by increased efficiency in our core operating functions. In line with our Q4 results, we anticipate other income to increase as the stronger dollar creates gains in our foreign currency hedge instruments. We expect our effective tax rate for fiscal 2011 will be in line with the fiscal 2010 full year rate.
And finally, we believe that our ongoing focus on working capital management will continue to generate strong cash flow. As we discussed in greater depth at our recent analyst meeting, we're confident that our cash flow can support additional investments to drive profitable growth and increasing cash returns to shareholders in the form of higher dividends and share repurchases. Over time, we expect share repurchases will reduce our average share count and increase EPS growth.
We're proud
of what we accomplished in fiscal 2010. Our ability to deliver results over the last 18 months gives us great confidence in our brands, our business and our team. And as we begin 2011, we're very much aware of the ongoing pressure on consumers around the world and the high level of macroeconomic volatility. Those conditions demand that we maintain a high degree of flexibility and we will. But we've always believed that those conditions also create opportunities to drive competitive separation.
So we'll also be aggressive in attacking opportunities as they arise. At Nike, we're at our best when we're on the offense. We're now ready to take your questions.
Hey, Don, maybe I'll just step in real quick and correct make quick correction. I believe I misstated the China Futures number when I said 6% when it's actually 16%, which is what it is in the press release. So, apologize for that. Thank you, Charlie.
Operator, we're ready to take questions now.
Our first question is from the line of Chi Lee with Morgan Stanley. Please go ahead.
Good afternoon, everybody. Don, I guess question on the gross margin guidance down a point. Can you help us better understand what your assumptions are for the puts and takes for that guidance? Sure. Well, first thing I want to emphasize is, as we've said before, we still have confidence in the long term that there's opportunities to expand gross margin.
And one of the things I talked about that helped us in FY 'ten and we also believe are going to continue to generate some positive impact in 'eleven are the gross margin initiatives that we've talked about a lot, things like lean manufacturing, style productivity. Those are things that we've invested quite a bit in the last few years and we saw benefit in FY 'ten and we are assuming continued benefit in FY 'eleven. The major change year on year is that we had a fairly benign macroeconomic environment at least from a macro from a gross margin standpoint in FY 'ten. We had fairly low input costs, oil prices, labor, those were things that were fairly favorable for us in FY 'ten and also the foreign currency environment really reflected about 12 month lag as it usually does. So it was a fairly favorable foreign exchange environment as well.
Those macro factors are really swinging more to a headwind in fiscal 2011. So we do expect to see some increases in raw materials that are chemical or petroleum based. We certainly see some labor cost inflation in Asia and there are some knock on effects to oil prices in the form of freight. So we expect that's a bit of a drag. We do think FX will go to headwind.
And then finally, as I mentioned earlier, we've got some good news, bad news with the strength of the running line for fall and holiday that's creating the need to do some additional air freighting. So combination of those factors, we really think that we're going to see some margin pressure through fiscal 2011. Thank
you. Our next question is from the line of Bob Drbul with Barclays Capital. Please go ahead.
Hi, good afternoon.
Hi, Bob.
And Kelly, welcome and good luck.
Thank you.
I guess, the first question I have is related to sort of more on the macro side. When you guys look at the order book in the futures in the quarter that you just finished and reported, are you seeing any sort of use the word queasiness amongst your retail partners? When you look at the futures orders being so strong, are there any change in cancellations or anything that we should be concerned about or is the strength of that futures number as good as it looks?
Bob, this is Charlie. No, I think it's as good as it looks. We're seeing a very strong brand presence around the world. And I think the innovation that we're introducing into the marketplace through the product lines that are coming in are being very well received. I think a lot of the things that are going on both footwear and especially in apparel, I think one of the numbers I'm most proud of right now is the continued acceleration we're seeing in apparel.
But in both footwear and apparel coming out of World Cup, we've got the basketball festival coming on and we've got very strong sell throughs in the marketplace gives us a lot of confidence as we look out to the future.
Great. And then, Don, on the currency, I guess, can you talk a little bit about sort of the hedging program that you have in place and sort of how that is expected to sort of minimize the downside or protect you as you look at some of the movements that we've seen in currency over the last several weeks months?
Yes, that's a great question, Bob. And as you know, we usually say to people a good rule of thumb is about a 12 month lag in exchange rates. We've seen the euro and the pound weaken over a fairly significant amount of time. That's really accelerated in the last 6 to 12 months. So we're definitely going to get some short term insulation from this.
But as you know, you can delay the impact of the exchange rates. You can't actually eliminate it. So what we expect to see here is the fact that last year fiscal 'ten, we actually had some pretty favorable exchange rates because we actually put those on prior to the crisis. So we had some euro exchange rates that were in the mid $1.40 space last year. We're going to start to see numbers that are more in the $1.30 and change as we go into fiscal 'eleven.
So it's really the lag effect of the long term strengthening of the dollar and the erosion of the European currencies is going to affect the foreign exchange in fiscal 2011.
Great.
Thank you very much.
Next question?
Our next question is from the line of Michelle Tan with Goldman Sachs. Please go ahead.
Great. Thanks. I guess just a little surprised to see the revenue a bit light of your futures number from last quarter. And I was wondering how much is that really about walking some of the closeout sales that would be in that at once business? And how much did the less closeout sales as a whole contribute to the gross margin upside this quarter?
Well, just to hit
it from a numbers standpoint, Michelle, the North America commentary about footwear and apparel, we had significant drop in closeout revenues for both footwear and apparel in North America and that was the most pronounced. As I said in my gross margin commentary, that was a piece of the 4th quarter margin upside. We had a lot less in terms of volume of closeouts and the closeouts we did do were a lot more profitable just because we were managing the marketplace very proactively.
Sure. Is there any kind of magnitude you can give us in terms of how much that contributed to the gross margin?
No, at
this point, I wouldn't want to put a number on that one, but it did have an impact. That was one of the items I mentioned.
Okay, great. And then just on Europe, it was interesting to hear that that region, I think you said it accelerated even beyond the World Cup window. And I was wondering if you could give us some color on traction by category that you're seeing there beyond World Cup. Is it the lifestyle or express piece of football that's driving it? Any kind of big standouts there?
Yes, this is Charlie. It's well, football is the leader of the pack, which we're very, very pleased to see the leverage that we're getting off of both the World Cup event itself and obviously the spend that we put into it. So but I think it does have a halo effect over some of the other categories. When you talk about football and the sportswear side of it, that is one of the bigger opportunities, I think we talked about when we were in New York on a longer term basis, because we really feel like that particular area is underdeveloped and we believe we have a great position and a great story to bring to that. Action sports continues to grow in Europe as does running and business, I don't want to get too far out ahead here.
It's still we're not seeing as much acceleration as we're seeing in places like China or the emerging markets. But we do feel like it is a stable market and has a pretty decent long term growth position to be in.
Great. Thanks so much.
Next question?
Our next question is from the line of Eric Tracy with FBR Capital Markets. Please go ahead. Good afternoon.
Maybe if I could focus on SG and A and sort of the spend as we think about next year, you said sort
of below
where revenue should come in, but from a demand creation, maybe the cadence for the year. And then I know you're investing behind direct to consumer. How should we think about that sort of playing out as well?
Well, we split the SG and A into 2 components, demand creation, which we expect to grow slightly slower than revenue. So for revenue, we said high single digits. So demand creation would be slightly below that. And as you pointed out, that will be front loaded. We do expect that we'll not only the completion of our World Cup campaign, but also the basketball festival in New York City.
So we should see a front loading into the Q1. On the operating overhead side, mid single digit is where we expect that to be for the year. And as I said, the 2 components of that, we are continuing to drive efficiency in our core functions and continuing to invest in direct to consumer. So on balance, mid single digit growth, but again really focusing our investment where we're driving profitable growth in direct to consumer.
Okay. And then maybe just turning to from a category perspective, obviously getting a lot of momentum on the running side of the business, particularly in men's, Obviously, women's training sort of the big strength out there right now around toning. I understand your position on that specific product, but maybe just talk about again the strategy and sort of come to market around be it Nike Free or other women's training product that we can maybe look to perhaps in the back half of this year?
Yes. So I think I mentioned this in the prepared remarks, our women's training numbers for holiday, we were very pleased with on the results and being received with some of the new product in response to what's going on in women's training. As we've stated, we really do believe in our free concept and we believe it's a great solution and provides great benefits to the consumer. And then you will see an accelerated introduction into spring summer as we continue to capture more and more of that female consumer.
Okay, great. Thank you.
Thank you. Next question?
Our next question is from the line of Kate McShane with Citigroup. Please go ahead.
Hi, thank you. Don, I was wondering how we should think about pricing in Europe with Nike buying its product in U. S. Dollars and then selling it through at euros. Is hedging taking care of that or will it result in price increases and have you seen any competitors increase prices in Europe as a result?
Well, first of all, just to give you a sense of how we think about pricing. I mean, we don't look at this as an across the board exercise and every season when we set prices, we're thinking about the economic environment. We're also thinking about the competitive set, what the competition doing, what kind of value proposition are we putting in front of the consumer. So those decisions are very surgical. They are season by season, market by market and certainly with the innovation pipeline and product and the strength of the brand, we have a lot more leverage
around pricing than our competition does, but we're
going to make those decisions We can't push back the macroeconomics forever. What the hedging program does is give us time to adjust the business structure. And certainly in Europe, I think the future is yet to play out. We are looking at that one very carefully. We're making those surgical pricing decisions and we're going to work the margin equation as we always do on a case by case basis.
Okay, great. Thank you. And on another topic in China, as you start to expand into the lower tier cities, are you planning at all to come out with a lower price shoe in order to better cater to that consumer? And how aggressive have some of your local competitors been in those lower tier cities as you increase your penetration?
Well, as we stated, we're starting to move more aggressively into that into the second, third and fourth tier cities. We are still finding considerable demand and interest around the NIKE brand as it is today. We continue, as Don just talked about, looking at pricing options and product introductions that may be on the lower end of the NIKE product range, as well as looking at different opportunities that we may have with some of the other brands in the portfolio. So we're still very bullish, certainly from a NIKE branded standpoint, but also the opportunities that exist for some of the other brands in the portfolio are something that we're taking into consideration as we look at it over the next couple of years.
I'll just add, this is I think that's one of the things you'll see not only in China, but other markets around the world is that will leverage the portfolio, the other brands in the portfolio to have a more integrated attack on specific market opportunities and China is a great example of that. So it's not a question so much of dropping the NIKE branded product pricing at the opening levels down as much as we're making sure that we're strong and competitive at our opening price points as we always will be, but also looking at the portfolio to help supplement some of those opportunities that are definitely there, particularly in the Tier 3, Tier 4 cities.
Thank you.
Thanks, Kate. Next question?
Our next question is from the line of Chris Svezia with Susquehanna Financial Group. Please go ahead.
Good afternoon, everyone. I guess my first question is just focused on the North American business for one second. You had your revenues up 4% and I think Don you made the reference that the wholesale business was up 2% and your direct to consumer business was up 19% and apparel was up double digits and I believe that was on the wholesale end. I was wondering maybe you could just talk a little bit more about what's going on with footwear specifically at wholesale in the U. S.
Market, talked a lot about running, obviously that continues to do well. But maybe you can just talk about the other pockets of your business in footwear the U. S. Market and how that might play out for the balance of the year at wholesale?
Well, I think one of the things that we've talked a little bit about recently and it continues to play itself out is transition back to the performance product. I think that's being led by several things. I think technology and innovation, I think are big factors in that. We have pulled back on some of our sportswear product a little bit in the marketplace as far as the distribution and allocation of product. So we felt it was time to reset some of that.
We have a lot of momentum going on the performance side the business and we felt there was an opportune time to take advantage of some of those resets. So when you look at it over the next 9 to 12 months, we're very bullish, not only in running, but in basketball, in soccer and now that the training product is really starting to come forward in men's and women's, we really like the overall portfolio performance. And then when you throw action sports in on top of it, we feel pretty good about things on the performance side of the footwear business.
So on that, Charlie, just so on the futures number, when you look at domestic piece, obviously, apparel is growing pretty quickly there. But it's fair to say the footwear business is positive on that futures number?
Yes.
Okay. When you talk about sportswear, just so I'm clear, when you're talking about more Air Force 1 and that type of product distribution and
Correct.
Okay. So you pulled back some of the distribution on that product?
Yes. We've actually we've reset the Air Force 1 quantities fairly considerably.
Okay. And then my last question is just on apparel quick. Obviously, U. S, you're doing nicely there, but any color strength or opportunities you see there in terms of what's going on?
With regards to the World Cup?
No, excluding World Cup, Laurent. It's just so apparel internationally excluding kits and things of that nature.
Sure. Yes. No, again, pretty consistent story outside the United States as well. Performance is the driving force, apparel and footwear. The apparel numbers internationally are doing very well, led by performance.
Running is the leading category with regards to what's driving it outside and beyond football. And then as we look at basketball globally, it's something we're very excited about, not only the growth in China, but the growth overall internationally coming out of the Americas as well as starting to become a significant impact in some of the European markets as well.
Okay. Well, thank you very much. Good luck.
Great. Thank
you. Operator, we have time for one more call.
Certainly. Our last question is from the line of Sam Poser with Stern AG. Please go ahead.
Thank you for getting me in. I've got a just I'm going to read them all to you at one time, if you don't mind. The cost could you give us some more detail on your cost reduction initiatives? Could you talk about what the FX impact on gross margin was in the 4th quarter? And can you give us some color on how you're viewing demand creation overhead?
How that's where you're spending that money next year? And how we should view your planned repurchase activity for the year for 2011? And with all that cash, are you looking for any other any acquisitions or anything like that beyond the repurchase activity? And I know that's lot more than 2 questions, but I figured I'd answer it all ask it all at once. Thank you.
Yes. Hey,
I'll just jump in on
the first and lastly, you said the cost reductions, which obviously continue to be really important, particularly as we try to strengthen our gross margin performance in the midst of some headwinds coming up. And Don talked about some of this already, but Lean manufacturing, we continue to scale that and leverage that. Obviously, raw materials consolidation continues to be an opportunity. Making some good headway there. We're seeing some leverage on the factory consolidation that we've completed for footwear over the past year, have a bit more to do on apparel.
All these things have actually helped us achieve some strong gross margin performance and will help us going into the next year. We're managing the supply chain a lot tighter, reducing discounts to closeouts, increasing our closeout margins at the same time, managing inventory as well as we ever have. We're expanding margins from some of the other businesses, as we talked about some record performance there, cleaner inventories. So all in all, very, very proud of what we're doing to sort of manage that top line going down to the bottom line. We haven't done any price increases, but that's another lever in the kit that we may look at.
But at this point, we don't have any specific plans to do that. And as far as acquisitions go, nothing specific on the horizon, but I'll just say what I've always said, we'll continue to be opportunistic and look for the appropriate opportunities to grow from an acquisition standpoint as well. I think that's only the responsible thing to do.
So Sam, let me just direct traffic here a little bit. Mark just covered number 14?
Correct.
I'm going to take the foreign exchange impact on margins in the 4th quarter was really minimal. It was about 10 basis points up, so not much. And then with respect to SG and A, I think you asked it in terms of both demand creation and operating overhead. And operating overhead, as I said, is really direct to consumer investment, which is 2 things. It's new stores and we talked about that at our Analyst Day in New York City and it's also infrastructure building, new systems, new tools and so on, offset by efficiency in our core functions.
And then, as I think you also wanted to talk about demand creation, so let me hand that one off to Charlie.
Yes, Sam. And then just one other thing on the operating piece where we're leveraging the direct to consumer piece into the some of the partnership formats that we're expanding on with some of the key partners, whether it's DIGS Foot Locker and Finish Line here in the United States or some of the other partners Bell in China and some people in South America. So and then with regards to demand creation, I think we've talked quite a bit about where we are. It's front loaded for the year, World Cup, the basketball initiative and then a running initiative going into holiday, again, kind of lining up against where we feel our biggest opportunities new product coming in. We'll see how that goes in and hopefully we can exceed expectations.
But at this point in time, we're not ready to commit to it.
Just real quick on the SG and A on the demand creation, you spent 25% more this Q4 than you did a year ago. Can we expect to see that kind of growth on a Q1 over Q1 basis or will it not be quite as much?
Yes, Sam, I wouldn't want to get into the model building. I mean one of the things we've talked about a lot is that when we see something working, we need to be nimble and we did that in the 4th We had a great campaign around Right the Future. We had tremendous product on the pitch. We felt terrific about it and we invested in it and the results are coming in. So, wouldn't want to get into that level of detail, but you understand the framework for how we think about it.
Then the last question I had was about some more specificity on your repurchase thoughts in 2011?
We'll be buying our stock. And I think as we said at the Analyst Meeting in New York, our plan at this point is that we believe we can continue to increase cash returns to shareholders and that means increases in dividends and increases in share repurchase.
Thank you very much. Good luck. Thanks.
Thank you. Thanks everybody. We'll talk to you next quarter.
Ladies and gentlemen, this does conclude today's teleconference.