Good afternoon, everyone, and welcome to NIKE's Fiscal 2013 Second Quarter Conference Call. For those who need to reference today's press release, you'll find it at http:investors. Nikeinc.com. Leading today's call is Kelly Hall, Vice President, Treasury and 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 a mix of futures and at once orders, exchange rate fluctuations, order cancellations, discounts and returns, which may vary significantly from quarter to quarter. In addition, it is important to remember a significant portion of NIKE, Inc. Continuing operations, including equipment, NIKE Golf, Converse and Hurley are not included in these future numbers.
Finally, participants may discuss non GAAP financial measures, including references to wholesale equivalent sales. References to total wholesale equivalent sales are only intended to provide context as to the overall current market footprint of the brands owned by Nike Inc. And should not be relied upon as financial measure of actual results. Participants may also make references to other non public financial and statistical statistical information and non GAAP financial measures. Discussion of non public financial and statistical information and presentations of comparable GAAP measures and quantitative reconciliations can be found at NIKE's website, http:investors.
Nikeinc.com. Now, I would like to turn the call over to Kelly Hall, Vice President, Treasury and Investor Relations.
Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE's fiscal 2013 Q2 results. As the operator indicated, participants on today's call may discuss non GAAP financial measures. You will find the appropriate reconciliations in our press release, which was issued about an hour ago, and at our website investors. Nikeinc.com.
Also, I would like to emphasize to everyone that today's discussion of our NIKE, Inc. Q2 results will be focused on our continuing operations. As we reported in our Q2 press release, we closed the sale of the Umbro brand in Q2 and are in the process of completing the sale of Cole Haan. And as a result, both of these businesses are classified as discontinued operations. Unless otherwise specified, all of our comments today will address the results and outlook for our continuing operations.
With that, I would like to introduce our participants for today's call. NIKE, Inc. President and CEO, Mark Harker, will speak first 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'll now turn the call over to NIKE, Inc. President and CEO, Mark Parker.
Thanks, Kelly, and happy holidays, everybody. Our strong Q2 results and first half performance demonstrate that our strategies are working. For Nike everything starts with the consumer. Their insights enable us to innovate and this expands the power of our portfolio and sharpens our focus on the biggest growth opportunities. And that's how we deliver value to our shareholders.
Our Q2 numbers show the right kind of momentum as we head into the back half of the year. NIKE, Inc. 2nd quarter revenues were up 7%. Excluding changes in currency, revenues were up 10%. And that growth was well balanced across all brands, key NIKE brand categories and nearly all geographies.
Gross margin was down 30 basis points better than projected and diluted earnings per share growth outpaced revenue growth up 11% to $1.14 The global economy is increasingly complex and volatile. The pace of change is accelerating. As leaders of a global company, we need to understand the risks and the opportunity brought by this change. Even more than that, we must remain focused squarely on our business. It's that balance that allows us to create and expand profitable long term growth even in challenging conditions.
As I look forward to the remainder of fiscal 2013 beyond, I want to highlight 3 key drivers of shareholder value. First, our ability to connect and innovate with consumers second, the power of our portfolio and third, our ability to leverage both those strategic advantages to deliver sustainable profitable growth. For the first driver of shareholder value, let's start where we always do and that's with the consumer and innovation. We're proud of the breakthrough innovations we've delivered across our portfolio, like Flyknit, Fuelband, Lunar, Free, the NFL products, Pro Combat, Considered Design and many more. And we have even more great opportunities coming up.
Innovation at NIKE is about expanding into new spaces and leveraging new ideas and driving growth through new channels. Innovation is about the future. Digital is a great example. The word itself has become a bit of an industry free for all. It's a technology, a platform, data, a product, a sensor, a service, a community, all that's true, but it's all short of their role at NIKE.
I see digital as an amplifier. It highlights and expands the commitments we've had for decades, like listen to the athlete, connect with the consumer, enhance performance, expand the experience of sport and help others and ourselves reach our full potential. Of course, digital affects every part of modern life. There are 3 very specific parts of our business where we focus our digital investment. And that is digital enabled products and services, brand communications and e commerce.
And all three exist to amplify our relationship with the consumer. In products and services, what started out as Nike Plus in 2,006 has grown into a global community of 10,000,000 and a new generation of devices and data that help people all over the world become better athletes. In brand communications, our content goes viral and our campaigns are personal, segmented and surgical. We build a two way dialogue with our consumers that enables them to connect with Nike and each other in ways never before possible. This ensures our connections with consumers remain deep, meaningful and relevant, which is really at the heart of what Nike has been doing since we started.
In e commerce, we connect with consumers and make it easy for them to research, compare, customize and purchase NIKE innovation on their terms around the world. And that helped our revenue from digital commerce grow 39% in Q2. We are just beginning to tap into the potential of digital technology, but we believe the opportunity to drive growth long term is incredible. And we will be investing accordingly to capture that potential in product, in brand and e commerce. The second key driver of creating shareholder value is the power of the portfolio.
We've built a company that creates and leverages opportunity in the high energy world of sports and youth culture. We design and commercialize more innovation than anyone in our industry. And we do that through a unique and unmatched mix of resources, organization and strategy. Converse, Burton Brand and Hurley all broaden our consumer base and help grow our core businesses. As Charlie will tell you, the Nike brand category offense is the industry benchmark for delivering product relevance and consumer excitement.
The power of our portfolio gives us options and sometimes those options require tough decisions like choosing to divest of Cohan and Umbro. As we close the sale of the Umbro brand in Q2 and we work to close the sale of the Cohan brand in Q3, we'll shift those management and financial resources to the greatest opportunities to create sustainable profitable growth. With the divestiture of these businesses, we haven't changed our growth goals. We've highlighted them. We have even sharper focus on the tremendous potential in our core businesses and we're more confident than ever in our ability to realize that potential.
There are many great growth opportunities and stories across our portfolio and Charlie will go into that in much more detail on the Nike brand, but I want to touch on 2 areas, North America and China. In North America, we've created great momentum. This is somewhat counterintuitive to some given this market size and assumed maturity. But I see tremendous growth potential in North America, fueled by our continued success in transforming the marketplace along category lines. Even more exciting, North America is a glimpse into the future, the model for success we continue to adapt in key markets around the world.
And one of those key markets of course is China. In over 30 years of doing business there, we've learned a lot about the consumer, what they value, how they live and what they want and expect from us. These insights have made Nike the undisputed leader in this market and they shape our strategy as we work aggressively to position the marketplace for continued growth. We know what needs to be done in China and we know we can do it because we've done it before and we're confident we will continue to grow and lead this market. The progress will not always be linear, powerful change to unlock potential rarely is, but I truly believe NIKE's long term in China is enormous.
And that brings me to the 3rd driver of shareholder value and that's our ability to leverage innovation, consumer connections and the power of the portfolio to create sustainable profitable growth. And we've done that over a long period of time and under a variety of macroeconomic conditions. Our performance has allowed us to deliver increasing cash returns to our shareholders. In the 1st 6 months of this fiscal year, we completed a $5,000,000,000 share repurchase program and began a new 4 year $8,000,000,000 share buyback plan, the largest in our company's history. We announced a 2 for 1 stock split and we increased our quarterly dividend by 17%, marking 11 consecutive years of dividend increases.
As I said, the global economy is complex, it's volatile and changing and that presents both risks and opportunities. We're very confident we have the strength across our brands, our businesses and our balance sheet as well as a deep experienced team to manage the risks and seize the opportunities. In the end, NIKE, Inc. Continues to grow and prosper because of who we are, competitive, innovative and relentless. And I'll take that every time.
So thanks everybody. And now here's Charlie to take you through the Nike brand. Thanks, Mark.
I'm very bullish on what we continue to see out of the Nike brand and Q2 was no different. Innovative must have products, strong connections with consumers and another quarter of transforming distribution with our retailers and our own DTC business. We're able to consistently grow because we identify and resource our biggest opportunities. Mark mentioned this in his comments. It's about the power of the portfolio.
It's the same flexibility and opportunity that defines NIKE, Inc. It also empowers the NIKE brand. Q2 is a great example, a strong quarter overall with some major successes in key businesses around the world.
On a constant currency basis,
the NIKE brand global revenue was up 11%. We saw growth across all key categories and all geographies except China. NIKE brand DTC revenue increased 27%, driven by a 16% comp store growth and a strong increase in online sales. Footwear and apparel grew at 10% a piece and global futures expanded 7%. So let's talk about how that's playing out in some key parts of the NIKE brand.
Specifically, let's look at North America, China and the emerging markets along with a couple of the key categories. North America, we've seen a strong we've seen a run of strong double digit growth quarters in this market and the momentum continued in Q2 with revenues growing at 17%. Nearly every category was up led by double digit growth in running, basketball and men's training. Footwear revenue increased 13% and apparel grew 19%. North America is a case study in leveraging our strengths in both product, brand as well as distribution.
In product, look at the NFL, it was the most anticipated launches in football and in this market in years. That alone says a lot about our role as an innovator. We delivered a new level of performance and style for every player in the NFL. The success is beyond our expectations, which were pretty high to begin with. We also see a ton of potential for our Amplify Sports strategy to expand the NFL business into every dimension of the athlete's life.
That's how they compete, how they train and how they express themselves. The NFL license is a huge platform for innovation and product, brand and distribution, and not just in football, but across the whole of the men's training category. There's a lot more to come on that front. In brand, we talk a lot about the global stage of sports. We talk about the Olympics, the World Cup, Super Bowl, BCS, March Madness, NBA finals.
They're all big moments for our products and our brand. But as Mark highlighted, digital adds tremendous power in amplifying everything we do. Nike plus is a great example. It's a product. It's a platform for services.
It's an ongoing dialogue with our consumers. And it's a rapidly growing community that crosses categories, gender, age and geography. Digital at Nike is like innovation at Nike. It enables growth and opportunity for the brand. And so let's talk about distribution.
We continue to create differentiated category destinations. Football fans are in yard line stores at chance. Runners are in track club stores at finish line. Basketball players are in House of Hoop stores at Foot Locker. Athletes of all types are in DICK'S Fieldhouse and we continue to see positive results as our wholesale partners report that the comp store growth for these spaces are exceeding their fleet averages.
Consumers are also in our DTC brand and category stores, factory stores and shopping online at nike.com. All of these executions work together to help transform the marketplace and fuel continued strong growth in North America. I believe there will always be opportunity in North America. However, we don't take it for granted. It requires a relentless focus on the consumer and on delivering the products and experiences they demand from us.
North America is a major focus for us and we have every intention of maintaining our leadership position. Now let's talk about China. As I outlined last quarter, there's a lot going on in this market, an evolving economy, an increasingly sophisticated consumer and a marketplace still challenged by some high inventory levels of retail. We've seen similar change in other markets, just never at this pace. I also told you we're taking decisive action to position this market for sustainable profitable growth.
Our results in Q2 reflect these actions. Our strategy focuses on 3 things: continuing to build brand connections with our consumers differentiating consumer experiences at retail to improve productivity and profitability, and adapting and elevating our apparel products to align with the needs of the Chinese consumer. So let's start there. With our connection to Chinese consumers, Nike is the premium performance brand in China and we'll keep that distinction. We won't sacrifice our brand or the trust of the consumer to chase opportunities not grounded in performance and sport.
Anchoring our brand in authentic performance gives us the credibility and relevance to differentiate our products and brand from a sea of competitors. And as we've demonstrated in China and elsewhere around the world, that authenticity allows us to amplify sport and drive sustainable profitable growth in our training and sportswear businesses as well. We believe this is highly relevant to the needs and aspirations of the Chinese consumer and we're committed to staying connected with them. With regard to distribution, we're entering a new phase in China, placing greater focus on improving the productivity and profitability of our retail base. That includes both partner and our own DTC doors.
We still expect to increase our square footage over time, but the retail footprint will evolve to bigger, better and more productive retail spaces. We've mapped the key shopping districts and we're beginning to transform the distribution landscape, starting with the locations that matter most. Generally the biggest urban centers and their most important shopping districts. We're also increasing our focus on how to better leverage our supply chain and our centralized distribution center. Even though we're still in the early stages of this transformation, we're seeing some encouraging signs.
In Q2, our DTC doors continued to perform well, delivering a 10% comp store growth. And our wholesale partners have reported to us that they are seeing positive comp store growth and inventory levels in the market are beginning to come down. On a more surgical level, the specific wholesale partner doors we've transformed to align with the category offense are producing very solid early results and are delivering comp store growth at about twice the level of the overall fleet. This is very similar to the results we're seeing with the same focus in the U. S.
Market. And finally, in the product space, we're seeing improved sell through in our apparel styles with the new fit and silhouettes that we've launched for the holiday 2012 season, designed specifically for the Chinese consumer. Although there is still a lot of work to be done, we've made some solid progress in making China a healthier market in the short term and a stronger market in the long term. As Mark said, we know what needs to be done in China because we've successfully done it before and we're committed to continuing to invest in the 3 key areas that we will set that will set the stage for growth product, brand and distribution. We're doing all the right things to position the China marketplace to be a full market that delivers long term sustainable growth for the Nike brand.
Okay. A brief word on the emerging markets. They continue to perform at an impressive rate, reinforcing our premier position in this broad portfolio of markets. Revenue across the geography is up 18%. That's the 13th consecutive quarter of double digit revenue growth.
It's happening across our biggest performance categories, especially running and football, where we still have enormous room to grow. And it's not a single market that's driving those big numbers. It's happening in Brazil, Mexico and Argentina as well as other developing markets around the globe. In fact, in Q2 was the first $1,000,000,000 revenue quarter for the emerging markets. Now that's a big number anywhere in the world.
Clearly, the brand is resonating with this consumer and all signs indicate the emerging markets will continue to generate significant growth for the Nike brand. Okay. Let's shift over to another powerful dimension of the portfolio, the category offense. Once again, another impressive quarter for the running team, delivering double digit revenue growth yet again. And I continue to see a lot of opportunities for this category.
Participation rates are growing around the world, Our performance innovation is stronger than ever and apparel continues to bring new energy to the consumer. 3 of our most compelling product innovations today got their start and running: Free, Lunar and Flyknit. NIKE Free today is over $1,000,000,000 wholesale franchise and growing with about 50% of that business coming from categories beyond running. And Flyknit has the potential to revolutionize footwear on every level. Performance, lightweight, fit, comfort, durability, sustainability and profitability, everything.
And it's one of the most visually compelling innovations we've created in a long time. It's a tremendous opportunity to bring that life across the entire footwear portfolio. In distribution, we have 17 Nike running category stores around the world, all driving strong comp store performance. It's a great example of our Amplify strategy being executed at its highest level. That unique combination of performance, training and lifestyle merchandised across footwear, apparel and equipment serve all of the athletes' needs.
It's a significant competitive advantage for the Nike brand. Running is also a growth accelerator for the women's business. We made the strategic decision to leverage the power of 3 categories in a way that is meaningful to the female consumer: Running, Training and Sportswear. It's a cross category version of our Amplify Sports strategy, where women compete, train and express themselves across a broad spectrum of products, and it's driving strong growth in our women's business. If you look at the combined strength of women's running, training and sportswear year to date, it is outgrowing our men's business.
Better still, our women's business will be bringing a lot of new energy into the retail space this spring and on into the summer. Again, it's that power of the portfolio at work footwear apparel category brand and distribution. It's a competitive advantage that no one in the industry can match. Before I hand it off to Don, I want to mention Nike Basketball and the Jordan brand. Q2 means it's time to talk basketball.
Major releases from marquee athletes Kobe, LeBron and more highlight why we continue to be the most innovative basketball brand in the world. But basketball is not just a USA story, where we saw double digit growth in North America. But in Q2, we also saw strong double digit growth in Central and Eastern Europe and Western Europe, where we've seen a lot of energy following the Olympics. Basketball generates a lot of heat for the brand this time of year, and it's becoming more and more impactfully globally. So we've had a strong first half of the year and we're focused on continuing our momentum going forward, but we expect there will be there will continue to be some uncertain times ahead in this volatile global economy.
But we look at our game plan. We're well positioned to manage the external factors and we're laser focused on transferring top line revenue to the bottom line profit. With that, I want to wish everyone a happy set of holidays and here's Don. Thanks, Charlie. Our results so far this year demonstrate the strength of our business and the effectiveness of our strategies.
Yet every day the business press is filled with a litany of risks from political instability and economic volatility to rapid changes in market dynamics. Both the opportunities and the risks we face are truly unprecedented. As Mark said earlier, we need to be mindful of the risks, but continue to drive forward against sharply focused strategies to create shareholder value. I'd like to start by outlining 3 ways we strike that balance. 1st, continuing to deliver strong profitability and increasing cash returns to shareholders.
2nd, making focused investments in strategies that will deliver future growth. And third, staying strong and nimble to manage risk. So far this year, our global portfolio businesses has delivered strong growth despite softness in key markets like China, Iberia and Italy. And we've continued to increase cash returns to shareholders through consistent share repurchases and higher dividends. At the same time, we're investing heavily in strategies that we're confident will deliver continued growth.
We're expanding our direct to consumer businesses, generating significant incremental revenue and profits. We're investing to transform the wholesale marketplace with category shop in shop concepts in developed markets and partnered doors in developing ones. We're leading our industry into the digital world, creating compelling products and experiences that help athletes at all levels perform better. And we're delivering product innovation to consumers at an unprecedented pace and scale. We're confident these investments will deliver profitable growth and we'll continue to make them.
At the same time, we're mindful of the risks we face along with every other global company. To better manage those risks, we've built a broad portfolio of businesses, maintained a strong balance sheet and focused our resources on the highest potential opportunities for growth, divesting to invest. We've prepared for risk, but no one can fully anticipate everything that will happen. And that's why we rely on our experienced leaders around the world to adjust to market conditions and deliver our goals. With that introduction, I'll recap Q2 results for our continuing operations.
2nd quarter reported revenue for NIKE, Inc. Grew 7%. On a currency neutral basis, NIKE, Inc. Revenue increased 10% as the NIKE brand grew 11% and our other businesses grew 6%. Also on a currency neutral basis, Nike brand futures orders increased 7% driven by a 4 point increase in units and a 3 point increase in average price per unit.
Futures were higher for all geographies except China, which declined 7%, reflecting our actions to tightly manage the inventory going into the marketplace. On a reported basis, futures grew 6%, reflecting weaker international currencies. 2nd quarter diluted EPS grew 11% to $1.14 driven by strong revenue growth, SG and A leverage and a lower share count, partially offset by a slightly lower gross margin and a higher tax rate. For the quarter, gross margin was 30 basis points below the prior year, but better than the guidance we gave last quarter. Although there continues to be a great deal of volatility in the components of gross margin, we're seeing some encouraging trends.
The pricing actions we've taken over the last 5 seasons combined with easing raw material costs are now more than offsetting the impact of ongoing labor cost inflation. However, in Q2, currency changes reduced our consolidated gross margin by about 70 basis points. We've also seen significant shifts in the mix of revenues from higher to lower margin segments of our business. While growth in these lower gross margin segments delivers incremental revenue and profits, it does put pressure on our reported gross margin. With all that said, we remain confident in our ability to drive higher gross margin over time and continue to expect gross margin expansion in the Q4 of fiscal 2013 with the full year essentially flat.
As expected, demand creation was flat for the 2nd quarter following significant Q1 investments in the Olympics and Euro Champs as well as product launches for the NFL and digital sport. Operating overhead grew 10% for the quarter due largely to growth in our higher gross margin, higher cost DTC business as well as continued investments to support growth initiatives such as digital. The effective tax rate for Q2 was 26.8% compared to 24.1% for the Q2 of fiscal 2012. The increase was largely the result of an increase in our effective tax rate for foreign operations. Q2 inventories for NIKE, Inc.
Were up 9%, while NIKE brand inventory grew 8% versus last year. Over 80% of the Nike brand inventory growth in Q2 was driven by North America, which continues to show tremendous increases in revenues and futures. As a percentage of our worldwide inventories, closeouts are roughly in line with the prior year. Our main focus of inventory management continues to be China, where we're working to manage down inventory at retail. More on China in a few minutes.
Our balance sheet continues to be strong as we held $3,500,000,000 of cash at quarter end with less than $400,000,000 of debt. Our trailing 4 quarter return on invested capital was 20.4%, down 220 basis points from the prior year, largely reflecting the timing of earnings growth across quarters and the book Umbro. Now let's take a look at our performance across 4 key segments starting with North America, which delivered another remarkable performance in Q2. Q2 revenues for our largest geography increased 17% on both a reported and currency neutral basis, bringing year to date revenue growth to 20%. That equates to over $850,000,000 of incremental revenue.
Footwear revenue increased 13% and apparel revenue grew 19%, including strong sales of NFL product. Direct to consumer revenues grew 23%, driven by 18% comp store sales growth. Q2 EBIT for North America grew 31% as revenue growth, gross margin expansion and SG and A leverage all contributed to increased profitability. In Western Europe, Q2 revenues increased 4% on a currency neutral basis, despite persistent economic challenges in Southern Europe. We continue to be encouraged by our progress in Western Europe as the actions we've taken to transform the marketplace are showing early signs of success.
Revenue growth for the quarter came from higher revenues for DTC stores and online as well as increased wholesale sales in every territory except Italy and Iberia, where revenues declined 9% 23% respectively. Every key category reported higher revenues for the quarter, except women's training and action sports, which reported single digit declines. Running and basketball were the standouts with each posting growth well over 20 percent. As a result of the weaker euro, reported Q2 revenues for Western Europe declined 2%, but EBIT grew 23%, reflecting higher gross margin and lower SG and A. We're also seeing some positive signs in China.
As Charlie discussed earlier, we're taking decisive actions to position our China business for sustainable profitable growth. As expected, our Q2 financial results reflected the impact of these actions. We increased reserves for product returns and retailer discounts to clear excess inventory at retail. We also proactively canceled orders and reduced futures to tightly manage the amount of new product flowing into the market. Including these items, currency neutral revenues declined 12% and futures orders fell 7%.
On a reported basis, Q2 revenue for China declined 11% and EBIT decreased 16% as lower revenues and increased operating overhead were partially offset by expanding gross margin as the impact of our actions to clean up the market were more than offset by the benefits of higher prices and easing raw material costs. As Charlie indicated, we're seeing some very early signs that our strategies to transform the China marketplace are taking hold. Comp store sales are growing in both Nike DTC and wholesale partner stores. Inventory levels are beginning to decline and apparel sell through is improving. That said, we still expect lower revenue and EBIT from this geography over the next few quarters as we work to position our business to realize the tremendous growth potential that Mark spoke to earlier.
In our emerging markets geography, we continued to see tremendous growth in Q2 as revenues grew 18% on a currency neutral basis. Revenue growth was broad based as every territory grew and 5 of 7 key categories reported double digit increases. As Charlie mentioned, the geography posted its first $1,000,000,000 revenue quarter in Q2. On a reported basis, Q2 revenue grew 11% and EBIT grew 23% driven by revenue growth and gross margin expansion. 2nd quarter revenues for our other businesses increased 6% on both a reported and currency neutral basis, driven by mid single digit growth at Converse and Hurley and low double digit growth at Nike Golf.
EBIT for these businesses increased 13% driven by improved profitability at Hurley and Nike Golf. Let me now turn to the balance of year outlook for our continuing operations. Our full year expectations remain essentially unchanged, although the phasing of profits across the quarters has evolved. On a constant currency basis, we expect Q3 revenue to grow at a low double digit rate. For Q4, we expect mid single digit revenue growth as we anniversary strong revenues in last year's Q4 fueled by the Euro Champs Olympics and NFL launch.
For both Q3 and Q4, we expect reported revenue growth to be about a point lower. For the full year, we continue to expect high single to low double digit revenue growth on a constant currency basis with reported revenue expected to grow mid to high single digits, reflecting weaker foreign currencies, particularly the euro. For gross margin, we expect a slight year on year decline in Q3, generally in line with the year on year decline in Q2 as we continue to take actions to clear inventory in China and face currency headwinds. For Q4, we expect gross margin expansion of approximately 80 basis points. As a result, we continue to expect full year gross margin will be essentially flat despite the stronger than expected performance in Q2.
We expect Q3 SG and A to grow slightly faster than the rate of revenue growth at a low double digit rate as we shift some planned spending from Q2 to Q3 and continue to invest in our brands and growth initiatives. Q4 SG and A should grow at a low single digit rate as we anniversary demand creation investments in the Euro Champs and Olympics in Q4 of FY 2012. For the full year, we continue to expect SG and A to grow at a high single to low double digit rate. As you know, other income is very difficult to forecast since it's comprised of non operating items, many of which are non recurring or driven by macro factors such as currency exchange rates. Based on current information, we do not expect other income for Q3 or Q4 to be significant.
And finally, we continue to expect the FY2013 effective tax rate will be about 26.5%. As we look to the balance of FY2013 and beyond, we'd like to leave you with 3 key takeaways. One, we're continuing to deliver strong profitability and increasing cash returns to our shareholders. 2, we're making focused investments and strategies that are working and will deliver future growth in revenue, profits and cash flow. And 3, we'll stay strong and nimble to manage risk.
We're now ready to take your questions.
And your first question comes from Kate McShane with Citigroup. Your line is now open.
Thank you. Good afternoon. Hi, Kate. Hello. My first question is on the gross margins during the quarter.
Can you tell us what the difference was between what you had been expecting for Q2 and where you ended up during the quarter?
Well, first of all, I have to start by saying that on a business where we're operating in almost 200 countries and across all the different styles and product types, 50 basis points is kind of in the margin of error. But bottom line was we had pretty strong performance from the price increases we've taken over the last few seasons. And as I indicated, the combination of that and easing raw material costs is now offsetting some ongoing inflation in labor. We were only slightly down year on year and a lot of that has to do with mix changes and currency. So bottom line is we feel great about the trend line we're on in gross margin.
I think it's playing out as we expected it to. Our ability to forecast this thing with all the moving parts we have, I think this is pretty good shooting. And as you know, we don't manage one line out of the P and L. We manage the whole thing. So we're pretty pleased at how the Q2 came out.
Okay. That's great. And then my second question has to do with China. I really appreciate all the detail Charlie walked us through with regards to all the strategies you're employing in China currently. And I was just wondering, it sounds like you're in the very early stages of doing a lot of the category offense.
When can we start to see that be a little bit more prolific in the region? And when do you think that will start to contribute more effectively to any kind of inflection in a growth rate in China?
Yes. I think it's early in the game as we stated in the remarks. We feel really good about what we're doing and how we're doing it. We're seeing great results in the specific locations that we've started to move forward to. So I think as we scale it, where you start to see the impact, it's hard for me to pick a quarter or a date.
I would expect to see an increasing level of performance on a broader basis as we move down quarter to quarter. So the goal obviously here is to be decisive and move quickly as we can. We've talked about that the last two calls. I think some of the actions that we took over the last 90 days lead me to believe that we're moving both at an increased pace and in the right direction. The sooner we can get towards this market differentiation, consumer differentiation in the marketplace, the better off we're going to be.
And we're taking early small steps, but you can expect that to accelerate as we move forward. And Kate, one other thing too that I want to highlight about Charlie's remarks. One of the reasons why we talked about some of the underlying productivity metrics in the marketplace is that as we really differentiate the marketplace and build that platform for long term growth, you won't necessarily see it on the headline numbers over the next few quarters. As Charlie said, we expect that to get better. But one of the things we're really focused on is those underlying productivity metrics that are telling us that we're getting it right in the marketplace with the consumer and that's why we're giving you that level of visibility.
Yes. I have two points Kate, because China is obviously a big topic of conversation. One is the emphasis on working with the space that we have and making that space better, more productive and more profitable. And we think probably a little bit bigger on a per location basis to storytell the way we do. So we're very good.
We're excited about that. And the other one is focusing on the high end, the premium positioning of the brand. And we're going to continue to do that as we move forward as well.
That's great. Thank you. And your next question comes from Michael Binetti with UBS. Your line is now open.
Thanks for taking my question. Congrats on a nice quarter.
Thanks, Michael.
And Don just a minute, I want to ask you on the gross margins, but also want to congratulate you there. I know it's been a long road with some of the volatility the last few years. So it looks like it's starting to pay off. So congrats there. As we look back in time a little bit, you see gross margins peak out in about 2010.
Obviously, that was at the end of several years of currency going the right way. But as you look at that as where you peaked in the past, how confident you can get back there if you are? And how long do you think it takes on a longer term basis as we look at our models?
Well, I think trying to do this from a modeling standpoint is not exactly how we think about this. I mean, what we do is we're focused on the key drivers that differentiate our product and our brand in the marketplace. A great example of that is the innovation that we bring into the marketplace. That is one of the things that lets you move your margins up because you've got premium differentiated product that the consumer is looking for and not everybody else has it. So our approach to growing margins has been focused on those basic fundamental levers of moving margins higher.
We're confident we can continue to do that over the long period of time. Trying to pick a date or a destination point given all the volatility there is in the world is not something that we try to do.
Okay. And I guess that's a good point. The you now have the futures at least in the U. S. Lapping a pretty big price increase last February, yet the futures orders here accelerated in the quarter.
Can you just tell us about what the
units versus pricing breakdown in the U. S. Futures number looks like?
Well, not doing it geography by geography, but the unit actually, Kelly, do you have that number?
Yes. I
don't have it off the top of my head.
Futures?
The units versus price.
Go ahead. All right. We'll come back
to you on that, Michael.
Okay. And I think you had a shift in the China apparel business last year. Could you tell us what the revenues and futures would have been in China without that non recurring headwind from the apparel comparison last year?
I don't think that's a material driver of the trend line in China for this quarter, Michael. Okay. Thanks a lot, guys.
So, Michael, for the futures orders, the 7% on a currency neutral basis with a 4 point increase in units and a 3 point increase in average price per unit.
Okay. Thanks a lot.
And your next question comes from Omar Saad with IASI Group. Your line is now open.
Wanted to see if I
had some interesting comments around the basketball business, seeing a bit of a renaissance there. I know it's not as big of a category as running is, but wanted to see if you could elaborate on that, especially was interested in the fact that you're seeing something going on in Europe there as well. Is it core basketball, junkies? Are you seeing maybe a little bit of a broader kind of acceptance of the basketball shoe? And does it come at the expense of running?
Or how should we think about that as that gains steam?
Hi, Omar, this is Charlie. I'm going to take that actually from a couple of different angles and give you some examples. First of all, the performance side of the business is very strong and we're seeing some really great sell throughs at retail on some of the new marquee product. And so always makes us feel good. We always feel like we're headed in the right direction with that premium product.
I think the other things that are starting to that you're starting to see is, A, a little bit more interest in basketball in Europe. We're excited about that. And that is coming at both the performance level as well as an influence in sportswear. You're starting to see the basketball silhouettes outside the United States is becoming a little stronger. We're seeing styles like the Blazer in Western Europe becoming a very, very big franchise business for us from a silhouette standpoint.
And it's even creeping into the women's business where the Dunk 2 high is a new shoe on the women's side that it's becoming quite frankly becoming a bit of a phenomenon around the world. And so we're very excited to see the influence of basketball becoming more influential around the world, both on the performance side as well as the sportswear side. So it's with our position in basketball, it bodes well for us over the near and midterm. Thanks. That's helpful.
And Mark, I wanted to
ask you, you made some interesting comments upfront about digital and the importance of that as one of the key pillars of Nike's opportunity to create shareholder value. As you think about e commerce, how do you balance the Internet and how the brand operates on the Internet between kind of creating consumer connections and developing that relationship, almost as a marketing vehicle versus the commercial side of the business, where you drive it as a utilize it and lever it as a profit driver. And I'd probably venture a guess that you guys are probably under penetrated in terms of the Internet as a sales mix relative to some other discretionary brands out there. But just wanted to see how you're thinking about that?
Yes. This is Mark speaking. It's all interrelated to your comment, both the commerce side, the communications piece, social networking that we have a two way dialogue with consumer. We enabled consumers to talk to each other. We are strengthening the relationship we have with the consumer, certainly just through our communications, but also through the commerce side of things.
And then of course the product and the services piece, which is in its infancy stages right now, but we expect big things out of that piece of our business. But the point is, this is all interrelated and this is exactly how we're managing this part of our business. We have groups that are highly focused on each of these segments, but we also work this as a unified portfolio. And we see this as really the way that we're going to increase the power of the connection with the consumer. And then to your point on the e commerce piece is we're going to drive a huge commercial opportunity.
And yes, I think an underpenetrated channel for Nike. But it's a real holistic view of the digital world and then how it applies to Nike and the massive potential that represents. These aren't separate silos. These are interrelated. And again, that's exactly how we're managing it.
Thanks. Great job. Thank you.
And your next question comes from Jim Duffy with Stifel Nicolaus. Your line is now open.
Thank you. Happy holidays, everyone.
Hey, Jim.
Don, can I ask you to speak to the balance of the futures across the futures window? And then the three points of price in the futures, has that benefit run its course? Or would you expect there to be a longer tail on that going forward as you emphasize the premium end of the brand? Well, the futures are more front loaded. And as I talked about in the guidance section, we are overlapping last year's Q4 with quite a bit of Euro Champs and Olympics business in there.
So we've got stronger growth in the front part of the window. With respect to pricing, one of the things we also spoke to is that we do believe that we think there's price opportunity out there on a season by season basis. We do not expect to be doing this across the board, across the majority of the line. We think it's really more of a consumer value equation assessment where style by style we're looking at the pricing and particularly behind innovation, we think there's opportunity to move price up. But I don't think you're going to see the kinds of broad pricing actions going forward that you saw from us a year and a half ago.
Got you. Okay. And then Charlie, can you elaborate some on the changes to the apparel direction in China, particularly the new silhouette for the consumer and some of the performance direction of the product line that's resonating? Yes. I think, well, one of the things and we've talked about this in previous calls, the majority of our inventory issue in China is built basically built around a lot of the apparel product.
And one of the things that we felt pretty strongly about was some of the fit opportunities we had in the marketplace. For Holiday and I alluded to that in the commentary, market today, but it is very quickly becoming a higher percentage of the line as we move into spring and then on into summer. The response that we're seeing there both from a obviously a sell through standpoint and the way we've been a little bit more focused around the Chinese consumer silhouette wise, that new product is moving through the marketplace at a very nice pace and we're very, very comfortable with it and quite frankly happy with it. We've got to get more and more of that part of the apparel line into the marketplace, which the plan is to do as we move forward into spring summer. Great.
Thank you.
All right. Great.
Your next question comes from Eric Tracy with Janney Capital. Your line is now open.
Hi, guys. Good afternoon.
Hi, Eric.
I guess just a quick point of clarification, I want to make sure I heard correctly on the guidance, up low double digits revenue growth in 3Q. Is that constant currency or reported?
That's constant.
Okay. Did you
And we gave guidance for the Q4 of mid single digit. And for both of them, the difference between constant and reported, we think will be about down 1 percentage point versus the constant currency numbers consistent with our futures.
Okay. Okay. And then turning to the product pipeline, obviously, you've had a ton of great innovation, expect that to continue. You mentioned digital. Maybe specifically as it relates to Flyknit, certainly a really big opportunity, but maybe help us think about the cadence, how that business ramps from a top line perspective in terms of incremental distribution and how we should think about from a volume basis maybe over the next 12 months.
And then certainly from a profitability perspective, what type of scale you need in terms of really getting the nice margin lift given that it doesn't have any labor or very little labor associated with it?
Yes. This is Mark. I'm going to jump in on that. The Flyknit as you said, we're quite bullish on that opportunity. I think it's going to take a little while meaning 12 plus months or so to really get this to a meaningful scale in terms of some of those numbers that are going to have a more dramatic impact on the units and the overall margin numbers.
We are very bullish on scaling the manufacturing capability, the capacity. There is obviously from our vantage point a huge consumer appetite for this product. So we're balancing the aggressiveness to close that gap and meet that demand make sure that we're not getting out ahead of ourselves, so we don't we're not creating excess demand that we can't meet in the marketplace. So I think it's going to take it's going to ramp up consistently and aggressively over the next 12 months and beyond. And I think you'll continue to see this become frankly a bigger and bigger percentage of our total footwear focus and it will expand I think dramatically from a category basis as well.
Many of our innovations really start in running and then they move and are leveraged into other categories And Flyknit is certainly no exception. Some of the most dramatic and innovative and exciting product that I've seen behind the door there that I can't really get into with you all right now is in this blinded area and across some of the other categories. So it's a huge part of our future. And I think from a units and a margin standpoint, you'll see that continue to get bigger and bigger.
Okay.
Just to answer the second part of the question on the financials, just want to make sure I make 2 points. One is, this is an upper technology. We are really bullish on what the potential is here. At this point, it is half the shoe, if you will. And so we're working on putting all of the pieces together.
So I want to put that in that context. The second thing is that the trend line we've seen consistently as we launch new technologies is that we launch them and then we work our way down the cost curve. So our products tend to get more profitable the longer we work with that particular technology and we believe Flyknit will certainly be consistent with that.
Okay. And then if I could just quickly in terms of your wholesale partners, you've obviously had great gains domestically in terms of the shop in shops, be it Dick's Fieldhouse, Nike, the track club at Finish Line and House of Hoops. Sort of where do you stand in terms of that? What maybe what inning in terms of penetration kind of the incremental opportunities be it in those doors or sort of other areas that continue to sort of drive productivity those wholesale partners?
Yes. This is Charlie. Well, I'm going to I guess if I understand your question, one of the things that obviously we can do is more of them here in the U. S. Now we use those examples because most of the group is most familiar with those examples here in the U.
S. We actually have a lot of that type of activity going on in other markets around the world. We have some great soccer or football spaces in Europe that are performing extremely well and we're very excited about scaling those along with the examples that we've given you in the U. S. The other thing that it provides us is great learnings that we take to a market like China or Korea in a mono brand space where we can really take the category offense and use the Amplify execution in performance training and sportswear to really bring productivity and profitability to the mono brand spaces that we have in marketplace, places like that.
And so some of the references that we've made in China and some of the things that we're starting to do in places like Shanghai is starting to bring some of that category focus into these spaces that and we're seeing the lift both from a consumer response standpoint and obviously from a productivity and profitability standpoint.
Okay. Really appreciate it. Happy holidays.
Thank you.
Operator, we'll take one more question.
And your last question comes from Sam Poza with Stern AG. Your line is now open.
Question. I just wonder, could you talk I just wanted a little more on Flyknit. You did say over Free has been around a while. You say it's a $1,000,000,000 wholesale platform. Lunar, you've said in the past is well over $2,000,000,000 retail platform.
It took you 4 years to get Lunar there. Is free as excuse me, is Planet as big an opportunity? And how does it cross categories? I mean, I could does it have does the idea have stability enough to make a flighted basketball shoe, I mean down the road? Or is it more running oriented?
You talked a little bit about that.
I'll talk this is Mark again. I'll talk a little bit about that, but not too much for hopefully obvious reasons. Let me say I am incredibly bullish. I mean, I'm a product self admitted product geek here and very important not only to me, but to this company is the basis of our success. So we're very discriminating on new technologies like Flyknit and feel this is one of those technologies that has incredibly massive potential, let me put it that way.
Not only within running, as I said before, but across multiple categories. What form that takes, you'll see. I mean, that's all I can say. It will you can't judge the applicability of Flyknit based on the products that you've seen to date. This technology has tremendous potential, tremendous possibilities.
And as I said, some of the most exciting product we have in the pipeline is involving the use of Flyknit technology. And as Charlie mentioned in his note, the impact on performance, on the aesthetic, on sustainability, all these factors are tremendous and again well beyond running. And
it sounds to me as if you're working on a sort of an official Flyknit coordinating outsole technology? I mean that's just sort of what you sort of implied. Am I down the right road there as well?
No comment.
You sort of said that.
I totally added. Again, you've gotten you've probably got Mark right up to as far close to the edge as you're going to get him. But if he's a self professed product geek, I guess I'm known as one of the more commercial minded guys around here. But I think that I would only echo all of the commentary in the sense that think we've both been around here a long time. We've seen a lot of innovation come and go through this place and I think Flyknit represents one of those bigger opportunities that we all get so excited about.
So and one thing that I think we've overemphasized too is that we feel that strongly about it. We're going to manage it and we're going to ramp it at appropriate level both the way it ramps commercially and the way that you see it transform the way that footwear is used by the athletes. So it's exciting times.
Thank you. And then lastly on the SG and A, with the demand creation when we're looking at next quarter in absolute dollars, And how should we think about that in absolute dollars?
Well, think the best thing to do Sam is just go back to the guidance we gave around SG and A growth. I think that's the best way to model it.
Okay. So some of that's going to push over from Q2 into Q3?
But the guidance that we gave you includes that factor. So just the guidance we gave is all in.
Okay. All right. Well, great. And good luck. Have a great holiday.
Thank you, Sam.
And you too.
All right. Thank you, everyone. Have a happy holidays. And we'll talk to you after the New Year.
And this concludes today's conference call. You may now disconnect.