Nike - Q4 2011

Transcript

Gary DeStefano (President of Global Operations)

Good afternoon, everybody. How was lunch? Oh, great. There you go. That's a good sound. All right, we'll start off. Good afternoon. My name is Gary DeStefano. I'm Nike's President of Global Operations. When you joined us a couple of years ago, we talked to you that our job was not to manage the marketplace that exists, but to create the marketplace of the future. What I'll talk to you about today is our continuing quest to create, grow, and transform the marketplace. The other thing we'll discuss today is what Charlie and Eric and Trevor talked about earlier, our global competitive advantages. Certainly, the relentless flow of product innovation, the category offense, which, as you saw in that 90-second brand video, that was brand activation in one country, one year, 90 seconds' worth of highlights.

Our ability to touch consumers all over the world in a relentless way, as Mark said. Lastly, what Jeanne and I will talk about today is our ability and capability to transform the marketplaces around the world. Last time you were here also, we started a new geographic focus. In fact, our segments are slightly different than most of the traditional players in the industry have. I'll walk you through each of those geographic segments today and talk about the fact that we have accelerated growth in our new strategy, which was to focus on our largest opportunities in the world. The other thing we talked about last time was we believe we had a unique competitive advantage in our executional capability at the global level and at the local level. We said at that time that nobody has the ability globally, like Nike, the power of this brand.

Nobody has the teams, as Charlie referenced earlier, on the ground, like Nike, to execute locally. Nobody can do both of those things at the same time. As we like to say, the Nike brand around the world truly never sleeps. The other piece we shared with you last time was a vision, a vision for what we call marketplace 2015. We talked that it would be a holistic vision. We would work with our partners in this industry to really be a catalyst for change. We said we would segment the market to create additional capability and capacity and accelerate our growth, to create new consumer concepts, exciting, energizing retail environments, and that Nike Retail would catalyze that segment. We would optimize the strategy between ourselves and our retail partners so that our efforts were not cannibalistic.

We would align with our retail partners in terms of a three-year strategy so we could build and accelerate growth for both companies. Lastly, we would create a new financial model for this industry. We're happy to report that has worked and is working around the world. Transformation has begun. I'll share more with you. This is truly a global effort. You can see whether it's our largest partner Foot Locker in North America, or Sports Direct, who's been known as more of a value player in the U.K., or Sportmaster, the largest player in Russia, Belle, the largest player in China, Kamo, the specialty retailer from Japan, or Centauro, our largest retailer from Brazil, who actually happens to be in town today and will be joining us for dinner tonight at the home. All of these transformations have happened.

We have met and gone out and worked with everybody in their home court, if you will. They have all been to the Nike campus and met all of the Nike executive teams here. We have created three-year strategic plans with each of these customers of how we'll transform both their comp growth rate and their financial profitability. It's working. As everybody said to you, we're very proud of the numbers that we're posting this morning and the efforts of the teams around the world to drive this level of growth for Nike. 10% growth and an accelerating growth rate, as we've said, and to generate an additional $1.6 billion of revenue in one year, larger than most of our competitors in this industry. We believe we have the momentum to continue this growth, as you see Nike's futures numbers that have been posted yesterday.

The balance of my presentation will talk about the fact we believe we are accelerating our growth around the world, that we are creating leadership and separation, and that we are transforming the market. Let's start, and probably no surprise to you, in North America, our largest and most mature business. As Trevor said, one we're very excited about. We'll show you some of the results. We have not even started with the NFL yet. North America, probably what is a surprise to you, the unprecedented success in this marketplace. The growth rate here, 13% on revenue for the year, 14% on EBIT, continuing to leverage our cost structure, but most importantly, continuing to gain separation in this marketplace, the most important marketplace in the world. I think, again, you've seen the futures numbers posted. We're confident in our ability to continue to generate the success in North America.

I think the other piece that speaks to the North America business, we talked earlier about our ability to segment and more finely tune each segment of our business. The more we focus on a business, the greater our ability to energize that business and to grow it. North America today has six businesses that are larger than $1 billion in size. We believe we can grow each one of those segments in the future. Market leadership, it's not just about growth. It is about market leadership. This is where Nike really comes to the fore. Trevor talked to you about the category offense. We are able now, through the category offense, to come to the consumer 24/7, 365 in each and every one of these categories, all at the same time.

We are able to provide the retailer a continuous flow of new products in a way that was never possible before. Lastly, the transformation of the marketplace has really taken hold in North America. I think you've seen it in the results of some of these companies. Foot Locker was the first with the House of Hoops. People were surprised. What's a new basketball concept? We know that the comps are outproducing the fleet of that store and outproducing comps in this industry. DICK'S and the sporting good concept that they Nike Fieldhouse at DICK'S Sporting Goods, again, outproducing the fleet of their store and the comps in this industry. The Nike Track Club, that Finish Line, a new specialty running concept and a specialty market that nobody was investing in. A real transformation.

More importantly, if you talk to the CEOs of each of those companies, whether it was Ken Hicks or Ed Stack or Glenn Lyon, each of them would say to you they believe they're more strategically aligned with Nike today than at any point in the history of their companies. Transform the marketplace is working so well that we are not asking them to expand that presentation. They are asking to accelerate the presentation of those stores. This is the plan that we have in place with each of those three retailers and an additional expansion of the marketplace. I think the thing we're most proud of is, we said, that we would create a new financial model in this industry. We really have. You've seen it in the additional comp growth rates that have happened. You've seen the expanding gross margins.

You've seen the expansion of cash flows in this industry. As we were all watching the ticker backstage this morning, most of these companies are now sitting at 52-week highs in the industry. Great result and more work to do on this front. Let's move to another major mature market for Nike, Western Europe. We're very bullish on Western Europe. We think it has tremendous potential. It has been slow to growth in the past. The good news, we have returned to growth, and we are accelerating growth. I think, more importantly, one of the major markets and the major opportunities for us in Western Europe is Germany. Nike has posted double-digit growth this past year, and we're confident we can continue that growth. The other thing we really like about Western Europe is that it is becoming a performance-based market, and that plays to Nike's strength.

It plays to our innovation. Our running business was up double digits this year in Western Europe. Our sportswear business was up, and we're specifically behind our football business. We're very proud to be taken over, as Trevor said to you, the French Football Federation. It takes us in the heart of the major French competitor and puts us in the apparel business in France. We believe sportswear and Amplify will be a true growth strategy for us in this region. Amplify also allows us to transform the market, and there's no greater example than the U.K. As all of you know, our largest market, again a market that we have returned to growth. We have opened, which Jeanne will talk to you about later, five new Nike Pinnacle concepts in the U.K. in this past year. Jeanne will share more with you on that.

We have worked with each of our wholesale partners to redevelop and transform the marketplace in the U.K., and I'll come back and share with you more on that. We have expanded our Nike Factory Store business so that we can ensure the control of the Nike brand in the U.K., and we can create a premium market environment and protect the profitability of our retail partners who invest in these new and transforming concepts. What we are really confident about is that the market has shifted to a performance-based market. Foot Locker is not just expanding House of Hoops in North America. They're taking the concept internationally. The stores in Europe are working, and they're going to expand again on the continent.

As we talked earlier, Sports Direct, who has been known as the value player in the U.K., has bought an athletic specialty channel, a specialty sporting goods customer and soccer scene. As you can see from this presentation, it's a far cry from what's happened in the marketplace in the past. We're very bullish on that concept. Lastly, a catalyzed concept off of Nike Retail and the running store that Jeanne will talk to you about from Covent Garden. A partner, Sweatshop, has opened a running-only concept store that will expand throughout the U.K. It is a different market in the U.K. We'll continue to transform that marketplace. It's just in time for performance in Europe.

As you can see, whether it was the French Open, or whether it was Wimbledon, or the Women's World Cup this morning, or what's going on with the Rugby World Cup in the fall, or the two most significant performance events that will come to the continent next summer, performance is here to stay in Europe and a place to Nike's strength. The other thing we did that's different in Europe, Europe used to be for Nike as a segment, Europe, Middle East, and Africa. We wanted to narrow our focus on both the Big Five of Europe and Central and Eastern Europe. We created its own standalone region. It is now another $1 billion market segment for Nike. There's also something very unusual about this market. The two major markets in this geography, Turkey and Russia, were not number one in either of those geographies.

We see that as a great opportunity. In Turkey, we believe Turkey has the potential to be on par with Russia here in the near term. We have invested in Galatasaray, the most important cultural asset from a soccer and football perspective in the marketplace. It is the most important business in terms of the football business, the apparel business, and the sportswear business. It comes with 49 of its own branded stores. Russia, we believe, as you know from prior meetings, it will be a mega market for Nike. Our business there has been up double digits. As we talked to you about, we'll have a different strategy than what our competitors have in Russia. We will partner with our wholesale partners to create this marketplace. That strategy is working. Russia became our fastest growing country in the Nike world this year.

We continue to see great momentum in that marketplace. We believe Russia is on a path to be a billion-dollar market and be a very important marketplace not only for Nike, but for the world of sport. As you can see, Euro Champs in 2012, the Sochi Winter Olympics in 2014, and Russia hosted the World Cup in 2018. Nike will be there for each of those events. Now, Japan. The government in Japan has a strategy, one of hope, one of recovery. Nike is the same. We're proud of the team. We're proud of the work they've done. We have recovered all of our business operations in Japan. We think the team has been tremendous in terms of their leadership of our own team and recovering our business operations in Japan. The story is nonetheless the same. Nike's business is down 21% in Japan this year.

Certainly not what we expected. Certainly not what we planned for. I think what it does show is a remarkable story of the power of Nike's geographic portfolio. At a point in time when one of our major business segments was down 21%, Nike posted a historic high in revenues. I think it does speak to the power of the Nike brand around the world. There is one of hope. There is recovery. Our strategy is slightly different. It's not of hope or recovery. It is of growth. We expect the team to grow this market. We're looking at Japan not as a business that has shrunk to $766 million, but as a $766 million business that can be a growth opportunity of a $1 billion marketplace. We will focus on performance, just as we've done in the other marketplaces.

What we've seen in the last eight weeks, performance product is working, whether it's Nike Free, which Eric talked to you about, the Mercurial product, or Trevor mentioned the Dunk product. Each of these products have launched into the marketplace post the earthquake, post the disaster. All have sold through at 40% and 50% in the last eight weeks. We have momentum. We feel good about the brand and the potential in Japan. We continue to transform the marketplace and work with our partners. XEBIO will transform sporting goods. Kamo will transform the specialty business. ABC, the largest value footwear player in the marketplace, is creating a new segment of business, what we would call athletic specialty, and taking the brand really up market, if you will. Lastly, one of the things that really does give Japan hope, it's baseball. Baseball is the cultural epicenter of Japan.

It's a business that Nike has not participated in for the last five years. We have re-entered the baseball marketplace this past spring with our spring sell-in sessions that we had in Japan. We will work and lead the brand with Yu Darvish, one of the best athletes in all of Japan. We believe baseball will energize Japan. We believe it will energize Nike. We believe we can be a growth company in Japan and, again, be a billion-dollar segment. Now, let's move to one of the most exciting regions of the world, a region that's defined very differently than other companies. China is not part of Nike's emerging markets. Even without China, the macro trends are undisputable. 2.8 billion people, half of that youth, 1.4. 640 million person middle class, twice the population of the United States. Just like everyone at Nike, digitally connected and passionate about sports.

We're accelerating growth in this market, as you've seen. This year, emerging markets, again, without China, became Nike's fastest growing market in the world. Each of these countries in this geography grew at a double-digit rate. We're positive, and if you saw the futures numbers, that this momentum will continue. One of the major countries that will drive the growth of this region is Brazil. Charlie talked to you about it earlier. No other country will host the two major events coming up. It has only happened three times in the history of the world. We believe that will be the ignition point for Brazil as a country. It will not be the destination for Nike. 2016 is merely a starting line, just as Beijing 2008 was for us in China. We believe Brazil has the potential to be a billion-dollar market.

We believe by the time we come out of the Olympics, Brazil will be the third largest country for Nike in the world. If we want to look a little further out on the horizon to another major market, there's only one geography in the world that has two mega markets as part of its geography today. This is the emerging markets with Brazil and India. It is projected to be the fifth largest economy in the world by 2025. It is a marketplace that Nike will build over time, just as we have done in China. One of the things that's really incredible in India is not only is it the second most populated place in the world, but they're passionate about sport. They hosted the Cricket World Cup, the only culturally relevant sport in that country. This year, television, 700 million people watched the Cricket World Cup finals.

700 million people adopted Nike's Bleed Blue campaign. We believe this will take us time to build, but you'll see it as we play it out over the horizon that India has the potential to be another billion-dollar market for Nike. Lastly, there's certainly a big topic of conversation for all of us over the last couple of years, Greater China. The momentum continues. The team here continues following the positive macro trends. Obviously, the most populous country in the world passes Japan this year in terms of the second largest economy in the world. You can see the rising middle class, still incredible GDP growth, almost twice of what any emerging market country has. We're confident we can follow that trend and play as the market grows to what could be a middle class, as some are projecting, at 600 million people by 2015.

Charlie mentioned earlier, we set a milestone in China this year, surpassing $2 billion in revenue. A market that we talked to you about a couple of years ago, we believed had the potential to be $1 billion. You've seen our futures numbers. We're confident that we can continue to grow and expand this market. A big piece of that expansion will be the transformation of the market. Jeanne will talk to you more about Nike's own presence in China and how we'll build and create the brand experiences. We will change what is predominantly a partner monobrand environment and enter the marketplace three ways: with a Nike-owned, with a partner monobrand, and what we believe will be an emerging trend in this country, which is a multi-brand marketplace.

We believe each of those initiatives will create additional capacity in the marketplace and continue to fuel the growth of that market. It's not just about growth. What we believe is the brand itself is the most authentic, connected, and distinctive brand in China. As we showed you in the earlier videos, we have the capability in China to come at the consumer 24/7, 365, and have a planned campaign every month. I think what's even more impressive now is we have the capability to come to the consumer one minute after Li Na wins the French Open. Amazing number, 115 million people saw Li Na win that title. That's nine times more people than watched game five of the NBA Finals. Nike was there with the most relevant athlete for that point in time. Nike will continue, as Trevor talked to you about this summer.

In a summer where basketball doesn't exist, just as we did in New York last summer in the U.S.A., Nike will create basketball this summer in China. What company in this industry could bring Kevin Durant, Kobe Bryant, LeBron James, Dwyane Wade, Carmelo Anthony, and Chris Paul to China all at the same time? It'll be a 13-country tour, and they will literally touch hundreds of millions of people. Lastly, as Mark talked about, it's not just about the brand or just about the business. It is about our capabilities. It is about our services. I'm sure two words that strike fear into your heart: the largest and the greenest warehouse in Asia. To give you a little bit of comfort, there's another new Nike capability. This large facility was brought in on time and actually under budget.

It's a tremendous effort by our team and really positions Nike well for the future growth capacity in this marketplace. This year, Charlie mentioned we will go in October to China to celebrate 30 years of business in China. I think no market more clearly demonstrates Nike's ability to create the market than China. It has taken us 25 years to build a billion-dollar business in China. It took us four years to double that business, and we're confident we'll double it again. We last leave you hoping that you know that Nike is a growth company, but it's also a company that is accelerating our growth. Confident that Nike can grow a mature market such as North America, accelerate its growth.

We can create a new market, our second largest in the world, such as China, and that we can develop and create the emerging market business to power our growth over the next decade. Confident that we are growing our growth and accelerating globally, that we will be a catalyst for leadership in this industry and to transform the marketplace. Most importantly, confident in ourselves and our team and in our own future because we do believe and we remain steadfast in the belief that the best way to predict the future is to create it. Thank you.

Jeanne Jackson (President of Direct to Consumer)

Good afternoon. I'm Jeanne Jackson. I'm President of our Direct to Consumer business here at Nike. For just a little bit of a reminder, direct-to-consumer, or DTC, are all of our retail stores and our digital commerce businesses across all of the brands around the entire globe. Throughout the day, you've heard some consistent themes, I hope, consistent themes around everything we do starts with the athlete. A relentless, have you heard the word relentless yet today? A relentless focus on our consumer. The importance of innovation, innovation in product, innovation in process, innovation in operations, and how these all come together to help create greater capacity for our brands and for our businesses in every marketplace in which we operate throughout the world. All of these themes that you've heard today have a sharp point.

That sharp point is in our stores and on our sites where we get the chance to interact directly with the consumer. Our direct-to-consumer business represents the area where, in its purest form, our brands can lead by example. It's where we help shape our markets, and we are able to create environments to showcase the strength of our category offense that Trevor talked about, the strength of our innovation, the strength of our brand stories. It's the place where we commercialize the new digital experiences that we're creating. It's the place where the brands come to life. It's the place where we realize that moment of truth, which is what we call it, with our consumers. That moment of truth is where we get the chance to interact with them one-on-one without anybody in the middle to make the story fuzzy.

A year ago, we introduced you to the pillars of our direct-to-consumer strategy. First, that we are already starting with a really solid foundation that positioned us then and continues to position us for a strong run of growth. Second, that we use our stores and we use our digital experiences to play an integral role in fueling overall growth. Third, that in order to realize these growth plans and opportunities that are before us, we had to and we did make a commitment to building our capabilities as a brick-and-mortar and digital retailer globally. Today, what I'd like to share with you is the progress we've seen over the last year against these three pillars that we introduced you to. First of all, let's talk about leveraging the foundation. Last year, we introduced you to our base.

Our base included inline stores, factory stores, and digital commerce across the entire portfolio of brands and, again, around the globe. This base was already a large and important part of Nike, Inc., with $2.8 billion of revenues in fiscal year 2010. In fiscal year 2011, when you roll up all of our retail businesses across the geographies and across the brand, our revenues increased by 16%. Our total owned store count increased to 756, up from 708 at the end of fiscal year 2010. Within this total are a number of new stores, as well as successful conversions of existing spaces like the Nike stores in Seoul and in Stamford, Connecticut, and in Covent Garden in London. A couple of people have talked about Covent Garden today, Mall of America, where we converted stores to the new concepts that we wanted to introduce to the consumers.

Additionally, we closed a few underperforming and non-optimized locations. Included in the new store count is a new and important venture. You heard Roger talking about a little bit first thing this morning, Converse's first flagship stores in Boston and New York. The level of the market and brand energy these pinnacle locations are driving really speaks to the future of that brand and the excitement we can bring to consumers through Converse. As store count, we talked about a minute ago, now up from 709 stores, went up 7%. We started by saying business went up 16%. Obviously, we got the lion's share of our growth out of greater productivity as we activated some of the investments we talked about last year to become a better retailer. Digital as well is a story of growth. We grew 50 million more customers from our base a year ago.

We also got greater conversion from the customers we had and greater average spend from the customers we already had and our new customers. Much more than store count and digital users, the heart of our story lies with the health of the growth we've seen over the last year. Our total direct-to-consumer business grew 16%, as we said earlier, to $3.2 billion, both from new stores and increased productivity. With the exception of Japan, for obvious reasons we've already talked about today, all geographies of Nike brand and all affiliate brand businesses enjoy growth across all concepts, inline, digital, and factory. For the year, on a comp basis, which all of you know is a really important measure for retailers, our stores grew 10%, double digits. Our overall digital business was up 25%. As mentioned earlier, Nikestore.com led the way at +32% in constant dollars.

The growth, again, came from both new customers and increased productivity. Last year, we introduced you to that strong foundation I talked about earlier. A year into the investments that we've made in our direct-to-consumer business, that foundation is proving to be a really strong foundation. Yes, we are ahead of plan. Now, let's take a look at how we're using our pinnacle concepts as a catalyst to fuel Nike brand growth, the second pillar we introduced you to last year. For the Nike brand, you heard both Charlie and Gary talk about the brand creating capacity through transformation of the marketplace. I won't take you through again that concept of the creation of capacity in the market. I will focus on our role, on DTC's role in that transformation.

Our direct-to-consumer business plays a lead role in creating the pinnacle, the peak of the marketplace, the premium experiences that ignite that marketplace transformation, including the concepts that have directly inspired some of the amazing wholesale partner executions that Gary just shared with you visually a few moments ago. Our transform strategy, which we introduced last year, calls for three concepts to lead the market. The first are the brand experience stores. It's the largest of the concepts, and it features six to seven of the Nike brand categories, the very best product and innovation that these categories have to offer, along with enhanced services like the NikeiD Studios, run clubs, fit clubs, shoe recycling centers, and one-to-one help with our new digital performance products.

The category experience store, the second of the three, brings a sharp focus to one specific category and the same kind of pinnacle services at the brand experience store, but through the lens of that particular consumer that cares deeply about that particular performance category. Both the brand and category stores are becoming community sport destinations. They're celebrating our love of sport with our consumer's love of sport and further strengthening that bond that we have with our consumer. The third concept is the Nike-only store. Most of these stores are partnered. These typically feature two to four categories that are particularly relevant in a local sport demographic. These Nike-only stores not only play the role of brand definition and elevation in the market in which they operate, but they may also represent our primary distribution in that market.

Let's take a little bit deeper look at the brand experience store, which is, again, typically 10,000 sq. ft.-20,000 sq. ft. and houses the critical categories. We've placed these stores in highly trafficked, highly commercial locations where millions of consumers can experience our brand, again, unfiltered. We opened five brand experience stores last year in such key shopping destinations, as you can see up here. We also remodeled two more key metropolitan stores in London and in Paris on the Champs-Élysées. Overall, these stores are performing ahead of our expectations, which is making us very happy. Since the remodel of London and Paris, these stores are up double digits, and they're well outpacing the balance of the market. They've provided remarkable stages as well for those sports moments that we like to celebrate with our consumers.

The NBA All-Star celebration in Santa Monica also introduced the shoe that Trevor talked about earlier when we had that incredible celebration in Santa Monica, Champions League final in London, or the launch of the French Federation kit, which we launched in Paris, of course. That stage that these stores provide is an incredible value to us as a company in creating that bond. In fiscal year 2012, we will complete our most ambitious renovation, which will be the brand experience renovation for Nike Town, Las Vegas. It's in a world-famous destination, and there's 40,000 sq. ft. under roof in that location. The brand experiences, the category experiences that will be in that location will be second to none.

We also plan to add more brand experiences in the iconic shopping destinations of Ipanema in Rio de Janeiro, North Park in Dallas, Texas, where we hope to have a wonderful Dallas Cowboys shop. It should be a lot of fun. Stratford, which is near the Olympic Village in London, Wuhan and Guangzhou in China. Most important for our local Nike family and for the many wholesale accounts that come visit us here in Beaverton is a brand new location for a Portland, Oregon brand experience store. The second of our transformation concepts that we've talked about are the category experience stores, where we take one of our performance categories and expand the consumer's perception of that category by showcasing all of the relevant products that are associated with that sport as training and sportswear relate to that consumer's lifestyle of that sport.

We locate these stores where the consumers who love the sport typically are. For example, Stanford, Palo Alto, California, it's a great mall. More importantly, it's in the heart of one of the most active running communities in America. In the last year, we opened or converted four category experience stores anchored in soccer and in running, with locations in Stanford, California, Covent Garden, Cardiff, and Manchester in the U.K. Under construction now is our newest category store in Westport, Connecticut, where an affluent and active customer base loves to run along the river there in Westport, and several more locations that will open in fiscal year 2012 that have not yet been disclosed. We're learning and we're refining as we open these new category experience stores. They are really taking hold with our consumer. The All-Star team in Covent Garden includes some U.K. track and field Olympic hopefuls.

It's really amazing to watch these Olympic hopefuls head out the front door of the store leading a run club who's going to run through the cities of London with a potential Olympian at the front of the pack. That kind of engagement creates a bond with the consumer and our brand that really creates separation between us and anyone else. Our third concept, the Nike-only store, are again monobrand and primarily partner-owned. These stores bring a full representation of a territory's select priority categories to life. They bring brand elevation in the marketplace and they drive profitability for the partner and for Nike. Trevor spoke about the categories that over-index in a particular geography. An example in China would be a store that might have running with basketball and both stories done: compete, train, express, so amplified.

A store in Brazil might have running and soccer: compete, train, express, amplified. We're going to roll this concept out with many of our partners over the course of this coming year. Gary spoke to the importance of these concepts and these partners in realizing the market potential, as many parts of our globe only see our brand through these monobrand doors. We have raised with these experiences, and that has helped influence wholesale partners like Finish Line, Soccer Scene, and Sweatshop to follow our lead in building Nike experiences of their own. You saw the images from those partners a couple of times today. They are integral to the category strategy and to the marketplace transform strategy, which you've heard about from Trevor, from Gary, from Charlie over the course of the day.

The approach we've taken with both the brand experience and the category experience stores is to first focus on the people who are in those stores. Almost half the employees who work for Nike, Inc. work in our stores in Nike Retail. It's the biggest lever we can pull. It's the greatest impact we can have to focus on those people. We invest in the folks closest to our consumer, raise our expectations of those folks, and give them our support in delivering our brand to the consumer. We're bringing athletes, bringing athletes to serve the athletes who are consumers. Let me share with you just a short video to bring this concept to life for you. As we committed to investing in direct-to-consumer and becoming a better retailer, you know systems are being designed and things are in work.

The first thing we could do is invest in our people and make a big difference with our people. I hope you got a glimpse into what that journey has been like for us over the course of the last year. At the Glasgow brand experience store, that team is our poster child for the best of athletes serving athletes, where we have, you can see the list up here. We've got a 400-m champion, a 3,000-m champion. We've got these running champions, these swimming champions, and even a former Celtic goalkeeper, all of whom are taking care of the consumers in that location, the second highest traffic shopping location in all of the United Kingdom. Those athletes are bringing the spirit of sport and who we are at Nike to those consumers.

After job one was to focus on the people, job two, or concurrently, was to focus on the product. Consumers are savvy. As Trevor highlighted earlier, they live fast-paced lives. They live lives that demand information and that sort of on-demand wow factor. In our retail stores over the past year, aside from having knowledgeable, passionate sales staff, we introduced the concept and reinforced that product is king. We have worked to sharpen the way that the product is presented. The attitude or inspiration that product projects is directly related to the caliber and quality of the story we tell. We have been focusing on bringing the best, most edited assortments of our most pinnacle product in each of these locations to ensure that the intersection of the brand, the story, and the consumer is concise and it's authentic. We have been relentless this year. There's that relentless word again.

We have been relentless in editing. We have been editing out all but the best. The consumer has responded with sometimes fivefold increases in the unit velocity of our best item. I think you saw some of that when you looked at Eric's presentation about how certain items have just exploded. Focusing on telling the consumer what the best items are, they have confidence in our vote. They vote accordingly and buy those items. The side benefit of that is we're also getting better turns out of our inventory. While we are using these locations to celebrate the love of sport that we share with our consumers, they become great stages for this, whether it's the women's race, the 7K Expo in Seoul, the English Premier League Championship in London, or the French Open in Paris.

While Rafa and Roger, and even Roger's dad, were hanging out at the Champs-Élysées during the French Open, I think Gary shared with you that 115 million people in China only cared about Li Na. Our stores were able to celebrate that win the next morning for those fans and bring Nike's love of Li Na to them and share that with them. We also continue to leverage the passion for great consumer retailers across the multiple brands. Roger and I have both mentioned over the course of the day the new Converse experiences in Boston and SoHo, where we've actually had the opportunity to raise price on the customization experience because the demand was so great we couldn't accommodate all the consumers who wanted to get their shoes customized on a given day. There's a new Cole Haan experience in SoHo and a new Salvation store.

We introduced that action concept to you last year, which is the store that has Nike, Converse, and Hurley all under one roof. We're opening a new Salvation store literally next week in the heart of beach country in Malibu. All of these are examples of the power of the portfolio in bringing a pinnacle expression to a consumer, the consumer that relates to that brand or that category, to elevate that brand or that category. Hopefully, that gives you a better understanding of the top of the pyramid, the pinnacle retail experiences. Another theme you've heard throughout the day is the quickly evolving and incredibly important world of digital connectivity. Delivering premium digital experiences is a critical part of our marketplace strategy. With over 50 million more consumers this year, that solid base we talked about at the very beginning is growing.

We are on our way to beginning to capture what is full potential here. You heard both Mark and Charlie talk about digital. You heard Trevor talk about digital. We, all of our brands, are important to youth. Youth spends their life in a digital world. It's not hard to imagine how significant our potential is here. We take a similar approach to digital as we do with our brick-and-mortar stores, product front and center, and premium experience that communicates an understanding of that consumer's needs and that consumer's passion for our brand. We strengthen that effort with the ability to customize product and the ability to access the ecosystem via mobile. Mark called out earlier today the necessity of finding the right partners to accelerate our growth.

This year, we're happy to have opened Nikestore.com sites in China, Korea, and Australia by finding great partners who could help us get started in those markets. As I've already mentioned, we have increased the number of consumers we serve by over 50 million in the last year. Our digital platforms will continue to expand the number of consumers we reach as we expand geographically and as we get more skillful at reaching out and serving our customer base even better. As with brick-and-mortar in digital, product is king. With product presentation, we made the first of our investments in digital to improve the online shopping experience through better merchandising. With some of the new tools, you can see here what you used to get on a Nike site, which I believe the number up there is 1,111 if you clicked on apparel.

Today, we merchandise a little and help the consumer through their journey. We make it easier for consumers to find and buy our very best products. We have made checkout just a little bit easier. We still have a long way to go, but we did make our first steps in the last year, and they're already paying off. NikeiD is one of the very special consumer experiences we have and one many try to copy. We innovate to stay one step ahead of those who would copy us. Utilizing the strengths of the new product and supply chain innovation that Eric talked to you about, we have shifted the focus of customization to performance customization with options on insoles and other functions with footwear to help an athlete be the very, very best they could be.

Once they've got the shoe to the best performance place they can get it, they can add whatever attitude or color to make it their very own. The launch of the customized Free 2.0 just 14 weeks ago has hit the maximum allocated capacity 12 of 14 weeks. I think we're onto something here with performance customization. Recognizing the amount of time we've talked about our consumer spending in that digital world and on mobile, we now have four apps, including the NikeiD app, the Nike+ GPS, Nike Training, and Nike Boom. We are currently working behind the scenes to make an even more aggressive stance in mobile access as we move all of our sites to HTML5 later this year. That will let consumers access it on all those iproducts.

It will also make, frankly, the site faster, which is our biggest complaint from consumers today. They would like us to be able to get through the transaction with a little more speed, and we will be able to do that. We also launched fairly significant changes in our affiliate sites. We continue to look for ways to leverage and get that back-of-house capability levered onto the affiliates so that the experience for all of our brands is elevated, and we can expand the geographic reach of those brands. We have talked about the top of the pyramid. We have talked about the digital side of the pyramid. Another critical component of the healthy marketplace development are our factory stores.

They provide a high-quality shopping experience for that value consumer and an excellent way to maintain brand integrity and inventory management for not only just our own retail, but for the wholesale marketplace. This concept continues to serve as a consistent, profitable model for us. Charlie highlighted very early this morning, if you can remember back that far, the impressive growth in Nike factory stores in North America and what they contributed to that market's performance this last year. In this last year, our very first investments were in these stores. We accelerated the remodeling, and we began to raise the consumer experience. We're also using tools and processes to improve the assortment in the existing stores we have around the world. As in our inline stores and in digital, you've heard this at least twice from me before already, product is king.

The product assortment job has been job number one. Making sure we have the right product in the right store at the right time in the right quantity has been job one for the merchants in Nike factory stores globally through fiscal year 2011. We're also introducing some operating practices, that sort of boring stuff nobody likes to talk about, in the back rooms where we're getting more efficient. We're getting better speed and movement of product to the floor. These improvements, even though they are just incremental improvements and we have many more in front of us, played a major role in contributing to the comp store increases in our financials and to the margin improvements in DTC over the last year.

As with all of our concepts, leveraging the improvements we just talked about, whether it's the impact of a remodel, the impact of focusing on product, or the impact of backroom efficiencies, leveraging these improvements across brands is contributing to performance improvements in factory stores across the portfolio. We've talked about leveraging the strong foundation that was pillar number one. We've talked about our role in fueling growth in the marketplace with the brand. The last of the pillars is that of building capabilities in our brick-and-mortar and in our digital capabilities as a retailer. Some of the investments we've already talked about in building a better team and in building better product assortments, as well as some of the processes we talked about.

I do want to give you just a bit of an update on some of the less glamorous investments that will serve us over the long haul as we continue becoming a better retailer and growing our DTC business. We have a new program called Merchandise University, which is an intensive educational role-playing core study that is geared to elevate our ability to bring sharply crafted assortments to our consumers. We've also invested in core operating tools, many of which will actually come online in this coming fiscal year: SAP Retail in North America, a new lease administration system, a new market mapping tool that we can use around the globe to locate stores, a new workforce management system set to launch this quarter to help us manage the payroll hours of all those thousands of employees.

The greatest payoff for these investments will come as we finish creating and begin to roll out operating playbooks for all of the partners we have around the globe who are operating Nike stores. How do they do a better job of merchandise assortments? How do they do a better job of efficiently getting goods to the floor? How do they raise their productivity and profitability? From an owned store growth perspective, by the end of fiscal year 2015, we expect to reach more than 850 owned stores for the Nike brand across all concepts and more than 300 affiliate stores, illustrating a clear and consistent growth trajectory. It isn't just about new store growth. It's also about improving productivity and profitability just as surely and just as steadily. I started all the way back at slide five, I think, by sharing that we are ahead of plan.

We are solidly on track to meet the goals and objectives we laid out for you last year in our five-year plan. In fact, we now expect to achieve and pass the $5.5 billion mark for Nike, Inc. DTC by the end of fiscal year 2015. The growth of DTC is also a large driver of the growth of total Nike, Inc. For fiscal year 2011, owned DTC represented 15% of the company revenue, but approximately a quarter of Nike, Inc.'s total revenue growth versus fiscal year 2010. Looking forward to 2015, we expect DTC to continue to grow faster than the company as a whole. We also expect monobrand wholesale revenue to become a larger part of our total revenue base. Progress report complete. Our foundation continues to strengthen, up 16% in revenue, double-digit comps in stores, 25% growth in digital, both new growth and a more productive base.

Direct-to-consumer is fulfilling its role in fueling marketplace growth with brand, category, Nike-owned stores, digital, and factory experiences that lead the marketplace and help create capacity. We're on track with our investments to become a better retailer, brick-and-mortar, digital, global, and multi-brand. To close out, before Don comes up to get the stuff you've really been waiting for, I'd like to show a short video that provides a glimpse of our progress to date and a bit on what's to come. Thank you so much for your time today.

Don Blair (CFO)

Good afternoon, everyone. Thank you very much for taking the time to come visit us. My objective at this point is to talk a little bit about what you've seen so far today and put it in context and give you a clear picture of how we expect our business to perform over the next few years.

I think you'll agree it's a pretty exciting picture. Over the last decade, we've focused on creating value for our shareholders by delivering strong results across three financial dimensions: growth, profitability, and capital efficiency. That framework still guides our thinking today. As we always do, let's start with growth. Growth is the engine that creates shareholder value. We're not just focused on any growth. As you know, we focus on quality growth. Without quality growth, there can't be long-term value. Quality growth is brand accretive. It's sustainable. It's profitable. It's capital efficient.

Today, we've shown you how we create that quality growth by building deep personal connections with consumers for each of our affiliate brands and for the Nike brand through a category lens, by delivering a relentless flow of innovation and must-have products to consumers as they compete, train, and express themselves through sport, and by creating an integrated marketplace of compelling consumer experiences in-store and online in Nike-owned stores and with wholesale partners. We think that over the long term, we can deliver quality revenue growth at a high single-digit rate. If revenue growth is the engine for creating shareholder value, profitability is the transmission. Our goal is to deliver mid-teens growth in earnings per share on average. We're always quick to point out that our financial model is not guidance for any specific year or quarter. That's not just legal language.

It illustrates really that our philosophy is to manage the business for long-term shareholder value. That means balancing near-term profitability and investments for the future. In the extremely volatile business climate that we faced over the last three years, we've explicitly considered that balance as we set our goals for each season, each quarter, and each fiscal year. That's what you expect us to do. The third element of our financial model is capital efficiency. We're focused on returns. Our goal is to expand our return on invested capital and consistently increase our cash returns to shareholders. You know, today, capital is fairly cheap by historical standards. We have not eased our standards for return on invested capital. To manage risk and deliver increasing cash returns to shareholders, we remain focused on increasing our capital efficiency. We're proud of what we've accomplished.

Over the last 10 years, we've delivered quality revenue growth, profit leverage, and improvements in capital efficiency. FY 2011 was no exception to that. In a turbulent macroeconomic environment, we delivered outstanding growth, profitability, and capital efficiency. As consumer sentiment improved and we continued to deliver outstanding products and experiences, our top-line growth actually accelerated through the course of the year into the fourth quarter. We finished the year with revenues of $20.9 billion, up 10%. That's more than $1.8 billion of incremental revenue in just one year. With improving demand, unfortunately, came input cost inflation and higher freight costs. Those factors swung gross margin from a tailwind in the first half to a headwind in the second half. That resulted in 70 basis points of erosion in gross margin for the year.

By leveraging our SG&A and aggressively buying back our stock, we delivered 14% growth in EPS for the year. We did that despite the impact of the natural disasters on our businesses in Japan. At the same time, we expanded our return on invested capital, even as we continued to invest in working capital, infrastructure, and innovation. We manage our business to create value for our shareholders. Ultimately, the market decides how much value we've created. Over the last 10 years, as Mark indicated earlier, we've delivered an average total return to shareholders of 17% a year. As you know, that outpaces about 90% of the S&P 500. We're very proud of that too. We know that you value what you think we're going to do, not what we've done. Let's look at the future.

You know, Mark likes to say that the distance between us and our competitors is not as important as the distance between us and our potential. We're convinced that there's still enormous growth potential for Nike and value potential for our shareholders. Last year, we outlined our plans to reach $27 billion of revenue by FY 2015. As Mark indicated earlier, we're very encouraged by the success of our strategies and by the strength of our businesses. We think we can do better than that. We've updated our FY 2015 guidance to $28 billion-$30 billion of revenue. We're committed to delivering that goal in the right way, with quality revenue growth at a high single-digit rate, with mid-teens EPS growth on average, balancing near-term profitability with strategic investments for the future, and doing it with expanding ROIC and increased cash returns to shareholders.

Those are ambitious goals, just like they were 10 years ago. We won't get there just by showing up. Let's talk about how we plan to deliver. You know, revenue growth is the foundation of our financial model, of course. On the basis of the trends we've seen in FY 2011, we're even more confident in the revenue opportunities that we framed last year. Those growth opportunities stretch across multiple dimensions of our business, starting with geographies. Within the Nike brand, we believe we can deliver strong growth in both developed and developing markets. Our developed markets, North America, Western Europe, and Japan, we already sell.

of product for the Nike brand alone. We expect those markets together will deliver mid-single-digit growth. In FY 2011, constant currency revenues for these geographies grew 7%. As Gary indicated earlier, that was with a 21% decrease in Japan. Revenues in North America, which is our largest and most highly penetrated market, grew an astonishing 13% in FY 2011. For several years now, we've been talking about the impact of the category offense on our brand and on our products. Trevor spoke about those elements today. Through the category lens, our connections to consumers have deepened, and we've aligned our products more tightly with how our consumers compete, train, and express. In FY 2011, we also saw a significant acceleration in the third element of the category offense, and that's distribution. As Gary and Jeanne both described, we're creating an integrated category-based marketplace.

Nike owns stores, mono-branded spaces in our wholesale accounts, and online. These retail experiences are exciting consumers, and they're growing our business as well as the businesses of our partners. We're still in the early stages of implementing this portion of the category offense in North America, and the game has barely begun in other markets. The opportunities for growth are equally exciting in the developing markets: China, the emerging markets geography, and Central and Eastern Europe. We are very well established in these markets. We already deliver about $6 billion of revenue for the Nike brand. We expect these markets to deliver mid-teens growth on average. That's going to be fueled by the same elements of the category offense as North America, with the addition of the tremendous growth we expect in the middle class for each one of those markets.

To use China as an example, we've built a $2 billion business there. As Gary indicated earlier, we're targeting $4 billion in annual revenues within the next few years. Our emerging markets geography contains some of our most rapidly growing territories. Brazil alone, we expect to be about a $1 billion business by the time we get to 2016. As Eric indicated earlier, we're also very confident in the growth of our products, Nike brand footwear and apparel particularly. Footwear is over 60% of the Nike brand today, and we expect it to grow at a high single-digit rate powered by the continuous flow of innovations that you've seen today: Nike Free, Lunar, Flywire. You can see them in the room next door. In FY 2011, we delivered double-digit growth in footwear. We added over $1 billion of revenue in one year. Actual demand was actually higher than that.

As we catch up on capacity, we expect to satisfy even more of that demand. We added over $400 million of revenue in the apparel business. That product segment remains one of the largest growth opportunities we have in the company. As with footwear, innovation is a key driver of our apparel business, and that's embodied in the success of products such as Nike Pro that you saw today. In addition, we expect our apparel business will disproportionately benefit from our focus on delivering those integrated category presentations at retail. As Jeanne outlined earlier, we expect direct-to-consumer operations to be a significant growth driver across all of our brands in the portfolio. Our FY 2011 results demonstrate that elevated brand experiences and improved execution are both driving profitable revenue growth across the portfolio brands and retail concepts.

These owned retail destinations have also helped us define a new model for the broader marketplace, with category retail concepts operated by wholesale partners like DICK'S, Foot Locker, and Finish Line in the U.S., and Belle in China. Our other businesses: Converse, Cole Haan, Hurley, Umbro, and Nike Golf contributed about $2.7 billion of revenue for Nike, Inc. in FY 2011. Revenues declined at Nike Golf largely as a result of what happened in Japan in March. As expected, we had lower revenues at Umbro as we were coming off the World Cup year last year. However, the balance of the rest of the other business portfolio played to form. Converse, Cole Haan, and Hurley each grew double digits for the year.

We continue to look for low double-digit growth out of these businesses going forward as they develop a wide range of untapped product and geographic opportunities within each brand. As you heard from Roger this morning, we also believe that Converse, Hurley, and Umbro can double their revenues from the FY 2010 base. A key driver for both Converse and Umbro is the conversion of key markets to direct distribution. In FY 2011, we took direct control of Converse in the U.K., and we took control of distribution of Umbro in France, Iberia, and Benelux. In FY 2012, both Converse and Umbro will be converted to direct distribution in China. If you haven't noticed, we're very excited about our growth opportunities with the businesses we already own. That said, we never stop seeking new consumer opportunities.

These could be adjacencies or subsegments of existing businesses, new channels of distribution, or new products and services. We have several on the radar right now. While we'll seek first to realize those business opportunities with existing brands and capabilities, we're always open to collaborations, partnerships, and acquisitions when needed. At Nike, we're never lacking for growth opportunities. As I said earlier, we are focused on profitable growth, so let's talk about that. Achieving our target of mid-teens EPS growth requires significant P&L leverage, and we expect to deliver that in three ways: first, by expanding gross margins; second, by leveraging SG&A; and third, generating financial leverage. Let's talk about those. First of all, gross margin. As you know, it's a function of factors we control and factors we don't.

You're all very familiar with the key macroeconomic factors that drive gross margin: foreign exchange, labor, and commodity costs, which are embedded in materials that we use to produce our products. Those are the factors we don't control. As we've indicated on our most recent conference calls, we do expect that these factors are going to be headwinds in FY 2012. The long-term picture is less clear, although we do expect to see some easing of input costs, particularly cotton, as we move towards the very end of FY 2012. While we can't control these macroeconomic factors, we do work to reduce the financial volatility that they cause. Historically, we've hedged our significant currency exposures with derivatives. We're now implementing a trading company structure that more effectively uses the natural offsets in our global business to reduce our net exposure. It also lets us more efficiently hedge the exposures that remain.

We are moving in the direction of reducing that exposure. We also apply innovation and operational capabilities to the factors we do control to help offset the macroeconomic headwinds and drive gross margin expansion over the long term. Generally, we're working in four key areas: product cost, supply chain management, pricing, and direct-to-consumer. Let me take each one of those in turn. Now, while the recent run-up in input costs is unprecedented, we have been working to reduce product costs for quite some time. Eric spoke to several of the cost initiatives that we have been on for quite a while, such as lean manufacturing and consolidation of materials and vendors. We have also made significant improvements through the use of digital tools for design, development, and sampling. We are not done by a long shot.

We believe there continue to be additional opportunities in the medium term with initiatives such as energy conservation and waste elimination, and in the longer term through more fundamental innovation in design, materials, and manufacturing. The second operational lever is supply chain management. In the last decade, we have made significant progress matching product supply and demand and leveraging our logistics infrastructure, especially in Europe and in North America. In FY 2011, our supply chain costs did increase as we needed higher levels of air freight to meet accelerating demand for our products and as we commissioned our China logistics center. While these headwinds will continue into FY 2012, we are confident that we will see lower costs beyond as supply and demand come back into balance and as we begin to leverage the capabilities of the China logistics center. The third operational lever is pricing.

As Eric explained, we have the opportunity to set prices every season. We do so considering a variety of factors, including input costs, profit goals, and the consumer value equation. We have taken pricing actions for fall and holiday, and we expect to take more meaningful price increases for the spring and summer 2012 seasons. Given the strength of the product innovation that you have seen today, our premium brands, and the strong marketing that we expect to have going into the European Football Championships and the Olympics, we are confident that these steps will improve our margins and overall profitability, especially in the second half of the year. The final operational lever we will use to expand gross margins is direct-to-consumer. These revenues, as you would expect, deliver higher first-cost gross margins than wholesale.

The operational improvements we have made over the last several years have further expanded our DTC profitability. In addition, our network of factory stores helps us maximize the productivity of our wholesale accounts by enabling us to liquidate closeout product more profitably and to keep the market clean in the full price channels. Now, although we expect gross margins will be lower in FY 2012, we continue to believe gross margin expansion can be a source of profit growth in subsequent years. We also believe we can expand our operating profit margins by growing SG&A at a rate below revenue growth. We generated significant SG&A leverage in FY 2011 as demand creation grew modestly, and we created efficiencies in operating overhead, even as we were investing in direct-to-consumer and our innovation agenda. Generally, we don't expect to drive much leverage from demand creation.

Strong brands are critical to the effectiveness of our financial model, and it's vital that we invest in those brands. This is particularly true in FY 2012 as we use the European Football Championships and the Olympics to build brand momentum and pull through higher-priced spring and summer product. We do expect to generate leverage from overhead by offsetting continued investments in direct-to-consumer and innovation with increased productivity across the rest of our cost structure. The last driver of mid-teens EPS growth is financial leverage. Over the last decade, we've accelerated our EPS growth by reducing our share count and decreasing our effective tax rate. We will continue to be buyers of our stock and will more than offset the dilution from stock option grants.

While no one can say what the impact will be of potential tax legislation, we will continue to develop and implement strategies to improve our tax efficiency. Now, in addition to generating profitable growth, we are still laser-focused on expanding ROIC and increasing cash returns to shareholders. We continue to target a 25% return on invested capital by FY 2015. To do that, we need to earn strong returns on the CapEx we invest in the business. We need to continuously improve working capital productivity, and we need to increase cash returns to the shareholders. Over the last four years, we've averaged just over $400 million a year in capital spending. Going forward, we expect that level to increase to about $600 million a year as we increase investment in direct-to-consumer operations, add capacity to support growth, and drive innovation.

To achieve our 25% ROIC goal, we'll also need to improve working capital efficiency. Over the last decade, we've improved our cash conversion cycle 37% by improving productivity of accounts receivable, accounts payable, and inventory. We've done that by improving our information systems, by more precisely managing the flow of product from the factory through to the retail floor, and by relentlessly focusing on all the nooks and crannies that tend to trap working capital. The bottom line is we believe that there continues to be opportunities to improve our cash conversion cycle, including inventory. So why are our May 31 inventories up 33%? About 10 points of that growth was financial. It was caused by currency fluctuation, and the higher carrying cost of inventory was driven by input costs and air freight.

Unit inventories increased about 23% for the Nike brand, and that was driven by strong demand and investments in initiatives like always available apparel programs. At these levels, our inventories are up versus the unusually low levels last year, but they're in line with the average of the last five years. Overall, we feel pretty good about where we are in inventory. Our futures are strong. The increase in inventory units is concentrated in North America and the emerging markets where demand has been especially robust. In most markets, inventory at retail is clean. Closeout inventories in total are in line with historical levels, and our network of factory stores is increasingly effective at clearing excess product in the marketplace. That said, we're not complacent about managing inventory risk. We believe that our inventories will grow faster than revenue through the end of Q2.

We've seen the growth of our competitors' inventories, and we also recognize the fragility of the consumer. We'll continue to be very focused on monitoring sell-through and maintaining an appropriate supply and demand balance. A year ago, we set out a number of ambitious goals for FY 2015. One of those goals was to deliver $12 billion of free cash flow from operations over the five-year period from FY 2011-FY 2015. We remain committed to that goal, and delivering it will enable us to continue to increase cash returns to shareholders in the form of dividends and share repurchases. As you know, we set our dividends on a calendar year cycle. Since 2002, we've consistently increased our annual dividend, raising our payout ratio to 29% of our trailing four-quarter EPS for 2011.

Our growth and our target payout range of 25%-35% still give us room to deliver consistent increases in dividends over time. We've also increased our share repurchases with another significant investment in FY 2011. For the year, we purchased about $2 billion of stock at an average price of $78.74. We're confident that was a great investment, and we expect to continue to increase our repurchase levels over time. In FY 2011, we returned $2.4 billion of cash to shareholders in the form of dividends and share repurchase. We expect that number to increase in future years. Now that I've outlined our goals for FY 2015 and how we expect to achieve them, I want to finish by giving you a sense of how we expect FY 2012 to shape up.

We expect high single to low double-digit revenue growth for the first quarter and the full year, reflecting the strength of our underlying businesses and more significant price increases in the second half of the year. We expect first-quarter revenue growth to be below the futures growth we reported yesterday, since the futures are more heavily weighted to the back half of the window, and we shipped a higher percentage of summer season orders in the fourth quarter than we did last year. We expect gross margin to be affected by input cost inflation and air freight, particularly in the first half of the year, with an improving trend in the back half as these headwinds ease and prices go up.

As a result, we expect gross margins to be down at least 300 basis points for the first quarter, but only about 100 basis points or so in the full fiscal year. We continue to target SG&A leverage, partially offsetting the pressure on gross margins. For the full year, we expect SG&A growth in the high single to low double-digit range, with a heavier weighting to the second half of the year in support of the European Football Championships and the Olympics. In aggregate, we expect EPS growth will be significantly higher in the second half of the year as we anticipate an improving gross margin trend sequentially through the year. As you've heard throughout the day, this is a management team that's committed to driving long-term shareholder value.

We do that by focusing on what we do best: leveraging the power of our portfolio to create industry-leading innovation, deeper consumer connections, and greater marketplace capacity. The environment in which we operate is more volatile than ever before. In that challenge, we see the opportunity to create competitive separation and distinguish Nike from other companies. Over the past decade, we've set ambitious goals for ourselves, and we've delivered on them through both favorable and adverse conditions. That doesn't make us believe our work is done. It makes us confident that we can create profitable growth and shareholder value in whatever conditions we face. Thank you for your time and attention today. Now we'll get set up to take your questions.

Kelley Hall (Senior Director of Investor Relations)

Hey, everybody. Hopefully, you enjoyed the day so far. I want to get us set up for Q&A. While our speakers come out and take their place, just a couple of housekeeping items. I'm going to do my very best to work the room and get to as many people as possible in the allotted time. I ask for your patience with that. The second is please wait until you have the microphone to ask your questions so that we can capture it for those listening on webcast. OK, we'll let our speakers get settled and get ready to go. All right. Anybody want to start?

Robbie Ohmes (Analyst)

With the ouetlook that Robbie Ohmes from BofA Merrill Lynch, Don, or for the whole group, with the outlook that Don just gave us, can you talk a little bit more about DTC growing faster than the rest of the business and how that could pressure the ability to leverage SG&A? I would imagine that puts upward pressure on SG&A as a percent of sales. I understand you're going to leverage overhead, but you keep demand creation flat. DTC is supposed to grow significantly faster than wholesale. Can you sort of walk us through how you get back to leveraging SG&A?

Don Blair (CFO)

Yeah, what we've been doing is we have been offsetting the investments we're making in both DTC as well as our innovation agenda by driving productivity in the rest of the cost structure. One thing to also bear in mind is DTC itself is becoming significantly more productive. As some of the things that Jeanne spoke to earlier have taken effect, we've had more velocity through those existing assets, and that's helped give us leverage as well.

Sam Poser (Analyst)

Good afternoon. Sam Poser from Sterne Agee. I just wondered if you could, you broke down the components of the gross margin on the last quarter. I wondered if you could give us how the merchandise margin versus air freight broke down in Q4 and how you're thinking about that, especially the front half of the year.

Don Blair (CFO)

I think the pattern we're going to see early on in the year, the first quarter is going to be very similar to the fourth quarter. There is, without getting into the specific reconciliation of the numbers, about 2/3 of the lower gross margin number was really accounted for by the product margins, including the air freight. There were some other elements we spoke to, like logistics costs and the commissioning of the China logistics center and some other items. Basically, about 2/3 of the reduction was really product costs, including input and air freight.

Sam Poser (Analyst)

Thanks.

Don Blair (CFO)

Did I not answer your question, Sam?

Sam Poser (Analyst)

At this point, you did break out on the last quarter. You said it was 100 basis points of product margin. You said it was 50 basis points of air freight, and then you had 45 basis points going the other way that got to the 105 basis points in the third quarter. I wondered if you could give us that same kind of detail for the fourth quarter.

Don Blair (CFO)

No, I think just in aggregate terms, I don't think it makes sense to break all the numbers. There are a whole lot of other factors involved. When you say we gave you that kind of a reconciliation, normally we don't give it in that level of detail. If you look at the 310 basis points for the fourth quarter, about 2/3 of that was input costs and air freight, with some offset from some of the cost initiatives that Eric spoke to earlier.

Kelley Hall (Senior Director of Investor Relations)

Real quick.

Don Blair (CFO)

Third time's the charm. OK.

Sam Poser (Analyst)

Because of these new, the 33% increase in the factory base that should be up and running by the end of the year, we would assume, and the inventory levels now, we would assume, regardless of what it is, that the air freight component of the gross margin should be the part in the back half of the year when you add in the price increases and so on that should go away because those product, the other margin pressures will remain likely. Am I thinking about that correctly?

Don Blair (CFO)

Yes, that's correct. What I would first caution you on here is you can't make a literal connection between inventory levels and air freight because capacity is not completely fungible. As we've talked about several times today, our running business, for example, was up 30% last year. A lot of that was new technology, Nike Free, Lunar, various products that are not necessarily equated to the same capacity that produces an Air Force 1 or even apparel. That inventory number includes a lot of different product types. Air freight, as Eric said earlier, is going to improve over the course of the year. We do expect that to be more in the second half of the year, not really in the first or the second quarter.

Kelley Hall (Senior Director of Investor Relations)

Next question.

Michael Binetti (Analyst)

Hi, Michael Binetti with UBS. I guess when we think about the price increases that are coming up, obviously, everybody's tested their price increases and feels a little bit of confidence. I don't know that we've seen the results or what to expect as the entire store starts to elevate prices with all the brands raising prices. You've mentioned a few times today the price increases that you guys are putting through. Maybe you could tell us a little bit about what gets you confident that the consumer can absorb those other than just brand strength, but maybe on products that aren't changing at all, that are just the sticker prices changing.

Charlie Denson (President)

I think, first of all, the conference is happening product-wise. The innovation is coming down the line, and some of the new products that we have in place today will give us great context to Google's quarterly. The other thing that we're looking at, I mean, we're looking at a potential.

Speaker 27

That's a good point.

Charlie Denson (President)

Lots of product coming through the quarter.

Speaker 27

That's a good point.

Charlie Denson (President)

Be able just to sort that pricing to stop. We're not pushing the envelope too far too quickly. I think over time, we'll continue to review our feedback basis as we always do in price-value relationships. As you know, there's an off-time approach that we use that will evaluate what we'll have. Like you said all day long, I think we're going to stay committed to the overall profitability of the brand. I think the value as well. I think you start to move into the second half of the year, some of these things will start to see an out.

Michael Binetti (Analyst)

We've seen a little bit of some increases already in DTC where the consumer hasn't flinched. I'll just add the strength of the brand, I think. I don't think there's anybody in the industry that has the brand strength and the level of product innovation, to Charlie's point, that we have coming. As we ramp up to London next summer, I think that excitement is going to continue to grow. I'm very confident. Not cavalier, but confident.

Speaker 27

Don, I was wondering if you could talk to us a little bit about the other income line as you start to realize a translation benefit in operating income. How should we be thinking about that directionally, and is there any kind of magnitude that you can help us with?

Don Blair (CFO)

We don't see there being major swings in that line. The conversation that we usually have on a quarterly basis is we tell you what the net impact is of translation of the P&Ls and other income and expense. At this point, we do expect there to be a fairly small headwind from FX in FY 2012 that was embedded in all of the guidance that I gave you earlier. We don't think that's going to be a huge set of numbers if the exchange rates stay where they are.

It means we expect that line is broadly going to be about at the level it was in the fourth quarter on a quarterly basis.

Omar Saad (Analyst)

Thanks. Hi, it's Omar from ISI Group. Two quick questions. You know the Brazil target $1 billion over time. Can you talk about the tariff situation there and whether you have in-country sourcing and how you view pricing and the development of that market given the high tariffs there? I'm also wondering if you could address why it seems like Nike might be seeing a little bit more margin pressure as a result of inflation versus some of the competition. Is it mixed? Is it a different mix? Is it pricing strategies that you're taking? Maybe you can kind of theoretically talk about why that seems to be the case. Thanks.

Charlie Denson (President)

Yeah, we've seen some increase in the tariff pressure in Brazil. One of the things we've done to offset that is primarily move most of the deliveries from China into Vietnam. It's not affected to the same level. At the same time, they're increasing our local production capacity in countries, and we expect to see that.

Don Blair (CFO)

With respect to the second part of the question, I'm going to let other companies talk about their margin equation. For us, what we expect to see is sequential improvement in margins over the course of the year. That is really going to be fueled by all of the things that we do control that we've talked about, things like lean manufacturing, the growth of direct-to-consumer, tighter supply chain, less air freight, as was discussed earlier, as well as the price increases that are accelerating in the second half of the year.

Faye Landes (Managing Director)

Hi, Faye Landes, Consumer Edge Research. First of all, just a little follow-up on the air freight thing, and then I have another question. On the air freight thing, you mentioned, Don, in your catalog of issues affecting inventory that air freight was one of them. I just want to make sure I understand what you meant. The other question is, can you just comment on Western Europe, which was not mentioned at great length in the course of the day, but when you reported, we would see the profitability was down considerably. If you could elaborate on what's going on there.

Don Blair (CFO)

Sure. The impact is just all of the costs of bringing the product in, landed cost gets inventoried. That was the element of the impact of air freight on inventory. With respect to Western Europe, we can have one of the other folks talk a little bit more about the business trends. From a profitability standpoint, Western Europe was the most significantly affected by foreign exchange in FY 2012. The major issue there was not that there was a major adverse move in the euro. It was that we had done a very effective job of hedging, and that affected our FY 2010 numbers. FY 2011 really was more normalized. We had put some pretty long-dated euro hedges out when the euro was above $1.50. We had that benefit in FY 2010. That is really one of the major differences between Western Europe and the rest of the geographies.

Faye Landes (Managing Director)

On a local currency basis, what would the profitability of Western Europe look like?

Don Blair (CFO)

That question is almost impossible to peel apart because you're dealing with what would prices have been had you had different exchange rates, and how each one of the currencies in the spending would have flowed through the P&L. We don't calculate it that way or disclose it that way.

Paul Swinand (Equity Analyst)

Paul Swinand Morningstar Equity Research. I was wondering if you could break down your growth aspirations in Greater China a little more. Obviously, the middle-class growth looks very promising. What segments do you see the most growth out of? What product areas, what sports? I thought I saw something on one of the slides where part of it was Nike Retail. I just want to clarify that's not owned retail. It's partner retail. If you could just clarify or talk a little more color about the segments.

Mark Parker (CEO and President)

The segments in China mean, again, we're very bullish on the growth. As you mentioned, the middle class, the projection of 600 million person middle class by 2015. We see that trend. We believe in that trend. GDP growth, although there's been some concern that it's slowing, as we said in the presentation, it's still almost twice as rapid as the other markets of the world. We still see bullish macro trends that we're convinced on. On the product front and the market share, I mean, we literally stratified the product offering. We can take more share at the premium price point, so CNY 800 and above. We believe there's a marketplace even lower than that. I think some of the commentary that's been made in the past that we will go from just tier one, two, and three cities and expand our reach there.

That is something that we worked on. We're picking up market share in that segment. We will do both. We'll make a geographic expansion. We'll make a product expansion. We think we can capture share both ways.

Charlie Denson (President)

I guess we're trying to go a little bit of a unique marketplace, especially with all the monogram segmentation. We see much better or more balanced net to people on top as well. Your tip comes a little unique. We expect both of those grows equally because of the monogram segmentation.

Jeanne Jackson (President of Direct to Consumer)

I think your question was whether or not it was partnered or DTC owned. It's probably just hard to be realistic about that. There is, however, a relative partner role that DTC will play in China just because they do another market. The factory store-based share is critical. It's even more critical than some other markets. We see those partners leave because they don't think to send their product to see them because it's so difficult to expose them or own that product to be able to see them. Some of the digital is nascent in China right now, but it's a part of the most connected population in the world. While the app isn't just for [third to third] today, it is just for [third to third]. It will be a tremendous digital opportunity.

The pedestal stores will play a critical role in helping those partners see how we want to show up. It will play the same role in China as a staple.

Kelley Hall (Senior Director of Investor Relations)

I'm coming, Kate.

Kate McShane (Analyst)

Hi, Kate McShane, Citi Investment Research. I wondered if you could quantify at all how much of the sequential improvement in revenue that we saw this quarter versus last quarter was because of a change in capacity rather than a change in demand sequentially. Over the long term, what does more capacity mean? It sounds like you're building out more capacity for some of the more popular items now, like Nike Free and Lunar. Over time, how does capacity come into play for your business?

Charlie Denson (President)

As you know, what we said in the slides there was that we think by the latter half of fiscal year 2012, we'll have caught up with capacity. That capacity is really oriented towards those innovative products that you mentioned, Kate. I think going forward, we feel like we're going to be better balanced between where our demand and our supply is. We're always on the lookout for good, solid, financially healthy partners in the supply chain, and we'll continue to do that.

Mark Parker (CEO and President)

The other thing I would just add is looking at the overall demand curve and where we're at and giving ourselves enough flexibility to flex up and down if the future is helpful. I think one of the things is that pressure off that air freight vendor is to make sure we do have flexibility in the supply chain to flex up and down based on sensitivity.

Don Blair (CFO)

Let me just add that the increase in capacity will really take root in this first half of fiscal 2012. I mean, we've had some steady increases, but the real ramp-up is happening in the next six months.

Maggie Gilliam (Founder and President)

I have a question for us. Sorry, it's Maggie Gilliam from Gilliam & Co. I have a question for Jeanne, please. Jeanne, could you elaborate a little bit about how you expect to ramp up the e-commerce on a global basis? I'm thinking specifically of Brazil, whether you're a partner or how you're going to do it.

Jeanne Jackson (President of Direct to Consumer)

Jeanne, this is Jeanne. How are you?

Maggie Gilliam (Founder and President)

Good.

Jeanne Jackson (President of Direct to Consumer)

E-commerce is, as we talked about several times today, I think one of our biggest opportunities. The reality is we need to make sure that we are relevant in each market and making sure that we're ramping to each market the way that market is evolving. As you maybe know, different markets drive different cycles, and that will lead to the e-commerce. They have an infrastructure, whether it's the ability to deliver a package via UPS. Something we take for granted is that that technology doesn't exist in every market. We want to be able to support that, whether it's a payment method. Some markets around the globe have easy to get things to happen. Maybe you want to be in China and have a great, for example, our e-commerce team today that has some rulers of something in the East and everyone.

Germany has a very robust, very easy to operate in e-commerce business. It's all the same market by market. Brazil represents a huge opportunity because the consumers there not only have a great affinity for our brand, but they also have a great affinity for e-commerce. While we're starting with a partner because it was a way for us to get there easily and efficiently, the long-term vision is for us to be there with all of our categories and all of our sites and all of our capabilities and have a really strong business.

Does that answer your question?

Christopher Svezia (Analyst)

Good afternoon. Christopher Svezia from Susquehanna. I have two questions. I guess first, just on gross margin, down 100 basis points for the year, down 300 basis points in the first quarter. As you go through the year and you start to get better supply chain, maybe currency is not as much of a headwind, you get that pricing. Is there a point at which you can actually see growth in gross margin? I assume fourth quarter could be easy given the comparisons, but is there an inflection point based on your guidance? The other question is related to SG&A, just in terms of it's growing roughly in line with sales, give or take.

I'm just trying to be curious about how you think about the leverageability of that SG&A and how we think about investments as you go into an investment year, a fiscal year or 2012 with all those events relative to prior periods, whether Beijing World Cup, same level or magnitude of spending, or just kind of how you're thinking about that.

Don Blair (CFO)

OK. At this point, I'm not going to give guidance on third, fourth quarter at this juncture. I think the math is correct. We do expect to see with the margin guidance we just gave for the full year and what we gave for the first quarter, we expect sequential improvement. We do think it'll be positive by the end of the year. Yes, without giving individual pieces of the equation. With respect to SG&A, the guidance we gave said, yes, we do expect to gain some leverage. If you looked at what we said about the rate of growth, it's not going to be huge amounts of leverage in this particular year, largely because of some of the factors that you just discussed. We do expect to gain leverage, and we do that when we are still investing in DTC, still investing in our innovation agenda.

We are always positioning our spending against the highest growth opportunities in the business and really driving productivity in the other parts of the business.

Eric Tracy (Analyst)

Thanks, Eric Tracy, FBR. Another disruptive or potentially disruptive force out there is the looming lockouts of NFL and NBA. Maybe if you could speak to prior lockouts, the negative impact you saw, given the uncertainty, how you think about planning the businesses, particularly on product launches as you enter into the NFL agreement, and certainly your dominance in basketball, how we should think about that.

Mark Parker (CEO and President)

I'll take the NFL first. Obviously, we're hopeful that there aren't any lockouts. The reality is with the NFL in a lockout now, it hasn't affected any of the scheduling yet. We're optimistic that it won't. For us, in our relationship with the NFL, it doesn't go into effect until next year. I'm not going to make any guarantees, but hopefully, they're not locked out still when we get to next April, and it shouldn't affect our launch as we move into that relationship. As for the NBA, I think, and if you think back and compare it to previous situations, labor issues around the NBA, which you'd have to go back five or six years ago, we had a limited relationship with the NBA itself, obviously with the players, much more direct tie to the business. Depending on what happens here, we will continue to utilize the players.

I think there was a reference already about all the players that are going to China this summer. I think everybody's very excited about that, including the players, as well as we have a very, very dominant footprint in college basketball. With the absence of an NBA schedule, college basketball will become that much more important. I think that's going to be a great position to be in from a basketball standpoint if there is a labor issue that might affect the season.

Eric Tracy (Analyst)

Go ahead, Brian.

I just want to ask my question.

Brian McGough (Managing Director)

All right. Thanks. Hey, guys, it's Brian McGough at Hedgeye Risk Management. Is it OK if I ask two? Thanks. I guess first, I don't know if it's for Jeanne or Mark, Don, Charlie, but as I look at Nike Retail, and I think Don, I might be stealing your line here, but it's been a little bit like Bigfoot in that we've heard a lot about it maybe making money, but we've never really seen it. I know there's been a lot of capital that's been put into it over the past two, three years. Looks like it's actually starting to work. I'm wondering if we should look at it as a standalone business or if the costs that are being put into retail are actually helping out the wholesale part of the business.

Is it fair to split them both apart, or should they be looked at holistically from a margin standpoint?

Mark Parker (CEO and President)

I'm going to just touch on the general point that our DTC business is actually really my point, my position, our position is that DTC is really helping our overall business on the wholesale side. I've said many times before that the investment that we're making in DTC is actually going to make us a better wholesale partner. I really believe that's true. I think the combination of DTC with our category offense has actually made us a much stronger company over the past two to three years. Everything you have to do to be successful in direct-to-consumer is really, in a sense, a microcosm of what you need to do to be a better company.

I think that's really playing out as you can see with some of the premium brand expressions that we have with some of our key retail partners. A lot of that is because we're actually a better retailer, not just qualitatively, but quantitatively. Jeanne, you want to?

Jeanne Jackson (President of Direct to Consumer)

The good news I can report is we are becoming more profitable. In the last fiscal year, our earnings, the EBIT growth greatly outpaced the sales growth. We thought the sales growth was pretty good. We're getting more productivity. We're getting more profitability. Things like the factory stores and digital are some of the most profitable things that we do. As those things grow and as those things grow faster than the base, we're seeing increased profitability and increased leverage. The first cost margin is very strong. I've worked for vertical retailers in my life, and these are pretty strong first cost margins to work with. We've got some runway, and we've got some capability.

That said, the big leverage is in as we become better, helping those monobrand retailers around the world, whether they're in Turkey or China or wherever they are, helping them apply the same principle so they're more efficient. Then they'll be more profitable, and we'll be more profitable. That's the big win. It's when we get all three of those working at the same time.

Don Blair (CFO)

I'll just add one thing. I think when Mark kind of spoke about it, from a category perspective, one of the reasons we're able to see the success that we see is because we work very closely with our own direct-to-consumer stores. We can actually test out these concepts, or we can focus our work against our direct-to-consumer that allows us to leverage it through the wholesale trade. From one perspective, you can look at clearly the profitability of that part of the business. Importantly, as we look at it in terms of how we operationalize the category offense, we learn so much through actually operating through the direct-to-consumer stores.

Mark Parker (CEO and President)

This is a great risk of over-answering the question here, but I want to just be very clear about one thing, which is to Jeanne's point, the digital piece and the Factory Outlet stores are some of the most profitable things we do. On the inline side, which you have to bear in mind, some of these stores are really the pinnacle presentation. Those of you who've been in the Nike Town stores are extraordinarily exciting category presentations. Those were not always designed to be more profitable, replicated types of formats. What we are now seeing in the new formats that Jeanne spoke to is a completely different thought process around how we're doing retail. This is retail that is going to be both profitable and branded creative, and we're on track to do that.

Brian McGough (Managing Director)

Great. Just one other quick question. I think this is an Eric question. I'm not sure, though. I actually thought that we'd see a little bit more about extreme sports, just given that you guys have a great message out there right now. I think a really big one, one of the biggest that you've had in a long time. Mark, I know this is one that's very near and dear to you. I think most importantly, you've got the product actually to back it up. I stepped out for a couple of minutes, so maybe I missed it. In case I didn't, could someone spend a couple of minutes just really talking about?

Eric Sprunk (VP of Merchandising and Product)

Yeah, absolutely. Obviously, we had so many categories to kind of take you through. We chose not to show action sports this time, but we continue to be very excited about our action sports business. It actually grew about 14%, so we felt very good about that. We're certainly seeing great growth within North America, and it continues to grow. We have a portfolio strategy, which we work with our affiliate business to kind of drive it. We feel very confident about that business. We saw some slowing in Western Europe, but we're certainly working through that as we continue to roll out.

Speaker 26

I'd add to that too, because obviously, within the portfolio, it's both Hurley and Converse. It's incredibly important. Hurley's had another good year. As Jeanne mentioned this afternoon, the new Salvation store, which is opening up in Malibu on a second door, is very exciting with a multi-brand category. It's definitely something to look out for.

Speaker 25

Yes, a couple of quick questions. Don, with respect to hedging, you mentioned implementing a trading company structure. What does that mean? How does it change how we think about your hedges?

Don Blair (CFO)

It is not something that if you were building a model for the next couple of quarters, you wouldn't necessarily see the impact of that. The impact is that we are now funneling all of our transactions with factory groups and the various countries in which we do business through a hub, which lets us use the natural offsets of currency to reduce the level of currency exposure. One of the macroeconomic factors that drives our business is foreign exchange. Sometimes it's to the plus, and sometimes not. What this does is it takes all of our sales in various currencies and our product purchases, which will increasingly be in multiple currencies, and lets us net those together so that we have less volatility from foreign exchange.

Speaker 25

OK, does it reduce the cost of your hedging?

Don Blair (CFO)

It does reduce the cost as well. The main fact here, for example, with China, we are largely net zero in China. The size of our purchasing and the size of our revenues are basically net zero, so our renminbi exposure is relatively small.

Speaker 25

OK, that's helpful. Thanks. No change to the philosophy, just change in.

Don Blair (CFO)

No change to the philosophy, but a more efficient vehicle.

Speaker 25

Great. Second question, you mentioned price increases with respect to fall and holiday. Is that different from what you talked to us about after the fiscal third quarter? Has there been any kind of retroactive price increases that have been put in place?

Don Blair (CFO)

No, nothing of significance. I mean, when we can take price increases at retail, price sensitivity and plan that. Nothing has changed of any material impact. Most of the price increases that we talked about last quarter will go into effect spring.

Speaker 25

Thanks. Don, you mentioned the shift in shipments in North America. I think being part of the reason that sales are going to grow below futures in Q1, can you quantify what that was, how much it helped Q4, and how much of a drag it is specifically on Q1?

Don Blair (CFO)

No, I don't want to provide that level of detail at this point. What I would tell you is if you look at the underlying trend lines of the business, for example, the futures order book, which gives you the order pattern and is not muddied by the shipping pattern, you can see the strength of the business in North America.

Taposh Bari (Analyst)

Hi, it's Taposh Bari with Jefferies. I wanted to ask you a question about Converse and Umbro as you take that business over in China. Can you just kind of talk about the maybe financial and qualitative opportunities there? Maybe contrast that to what happened with Nike when you took over that business a few years ago.

Eric Sprunk (VP of Merchandising and Product)

As you saw this morning, China offers for both Umbro and Converse much upside and opportunity. We see definitely taking a lot of what is happening out of the U.K., for example, in Umbro, or out of the U.S. in the Converse case. We see there's an awful lot of consumer connectivity and opportunity just as we built the model in other places.

Roger Wyett (President of Nike Affiliates)

You'll see more of an immediate upside opportunity on the Converse side, and Umbro will be a bit slower build. Both brands obviously have a long history and heritage, and both we see tremendous opportunity for growth in China.

Scott Emerman (Partner and Analyst)

Scott Emerman in Westfield Capital, just a few unrelated questions. Can you just speak to whether or not you anticipate any meaningful change in the mix between futures and at-once business? Secondly, your China business is much more profitable today than most of your other geographies. If you can just speak to the sustainability of that. Thirdly, if you could just talk about the cost environment for key sports marketing assets and maybe differentiate if it's meaningful between sports marketing assets in China versus here in the U.S.

Don Blair (CFO)

OK, there's three questions, some of which I can answer all the above, and then we can break them out.

The at-once futures mix, we don't see it continuing to diversify much more than what we've talked about. I think as the business grows incrementally across the business model, we talked about always available. We've talked about our retail footprint continuing to expand. I don't see that the futures will still be the best indicator for future possibilities, opportunities, and how to measure the business. I don't see that changing anytime soon. Second question was China.

Scott Emerman (Partner and Analyst)

As to the level of profitability.

Don Blair (CFO)

Oh, yeah. I think one of the interesting things about China, I think that it will continue to be as profitable. Actually, the third question relates to the China model a little bit, which is especially in sports marketing, China is able to actually leverage the global assets much, much better than probably any other business of scale or scope. Whether it's Kobe Bryant or LeBron James, or whether it's Manchester United or Wayne Rooney or Cristiano Ronaldo, all of those costs actually sit out in the respective business units where they're housed, and China leverages them. That being said, we're going to see China's sports marketing assets start to accelerate as that business accelerates and as the competition accelerates there in China. I would expect that to have somewhat of an impact on the overall profitability, but still very, very moderate.

Aline Avzaradel (Analyst)

Hi, Aline Avzaradel Capital Group. Can you talk about how you're gaining access to distribution in sort of tier two, tier three cities in China?

Gary DeStefano (President of Global Operations)

Yeah, I think the expansion of the distribution has been a planned strategy. As you know, we went in and basically focused on the three major cities. I think that strategy was very successful for us. I think over time, people are saying, hey, you need to be more aggressive. We actually did quite a study and found out that we needed to be more aggressive in those other tiers of cities and that we're, in fact, losing share there. There is, in fact, very little overlap between ourselves and some of the local brands. That has been a strategy that we have accessed those other marketplaces. It's typical to what we're doing. We would look at the marketplaces. We would create the strategy for distribution in those marketplaces.

As we said today in the presentation, what we believe will be different over time in China, what is today a monobrand marketplace, we believe Nike Retail will be a catalyst to changing some of the secondary cities in the future. We've stayed in the major cities today. We believe over time, multi-brand will exist in those marketplaces. Today, it's really about differentiating the monobrand partners that are there and working with those monobrand partners to make their doors more productive and more profitable in those cities. Basically, the distribution is there. We're going to leverage the distribution that's there and work to make it more profitable and more productive for our partners and ourselves.

I'm going to go ahead.

Mark Parker (CEO and President)

You're going to see deeper penetration, obviously, in not only the tier two, three, but four, five, six from Nike. As Gary touched on, I think the future is one, too, where the Nike brand, Umbro, Converse will be a multi-brand strategy against that market. We see when we actually combine multiple brands, really looking at the portfolio against the opportunity in China, I think there's huge growth potential.

Eric Sprunk (VP of Merchandising and Product)

I was going to just add, as Gary articulated, we talked this morning about collaboration and leverage, having the other brands, whether it's Converse or Umbro, coming in alongside and learning best practices and getting efficiency, whether it's on distribution or even whether we plug into, say, something such as basketball through a Converse. Obviously, the adjacencies and the complementaries will definitely be top of mind.

Gary DeStefano (President of Global Operations)

I think it was a great learning in the study when we did the studies to look at the fact that we were very complementary and not overlapping with our affiliate brands. That was kind of a key tipping point to our strategy to say, hey, we need to really accelerate that strategy.

Mitch Kummetz (Analyst)

Don, on the 2015 mid-teens earnings growth plan, a couple of questions. First, is there an operating margin target embedded in that plan? I know you talked about both operating margin expansion and financial leverage. I'm wondering if there's an operating margin target embedded in that. Secondly, once we get past 2012, as you think about operating margin expansion into 2013, 2014, and 2015, it sounds like gross margins, they were down 70 bps last year, expect to be down 100+ this year. As you get past 2012, does most of the operating margin expansion come from gross margin or SG&A? Is there any way you can kind of provide a little color on that?

Don Blair (CFO)

I think the math is inescapable. We do need to expand operating margins if we're going to grow revenues at the high single digits and earnings in mid-teens. As we said, there's those three drivers: gross margin, SG&A leverage, and financial leverage. The element of the way we manage this business, at the end of the day, you can do fantastic planning. When you do business in well over 100 countries and so many currencies, and it's as volatile as the world is, you essentially have to have a great team. You have to read the marketplace, and then you have to adapt. Our model really is a little bit more of a framework than it is a straightjacket. We have mapped out the operational steps that it takes us to work towards those goals. We are very confident that we can deliver against that.

We're going to be managing this business on a year-in, year-out basis based upon the environment we find ourselves in. I think if you look at our performance over the last three years or even over the last 10 years, we've run a slightly different model every year. We work in that framework of saying, this is where we want the top line to be. This is the bottom line. We want to improve capital productivity. We have to adapt as circumstances dictate.

Faye Landes (Managing Director)

Hi, Faye Landes again. First of all, just two things. First of all, on the Europe thing, can you just talk a little bit about the specific countries, the main countries in Western Europe? You talked about some of them, but not all of them. You talked about Germany. It's a lot. Germany more and is doing better. U.K. a little bit less. Didn't talk about Italy. If you could address that. Also, just on apparel, based on your results and results of other companies selling athletic apparel, it certainly implies that the market for athletic or athletically inspired apparel is growing quite significantly. Is that a correct perception? Can you just elaborate on that?

Gary DeStefano (President of Global Operations)

Yeah, sorry, Faye, that we couldn't address all the countries. Again, we're trying to spin the world in 20 minutes there. As we said, we focused on the big five countries in Europe. The good news is all of those countries are back to growth. That's a significant departure from where we've been in Western Europe. We're pleased with that. To your point, it's been a tough economic year. Some of the countries, specifically the southern countries, Spain and Italy, have been more difficult in terms of the macro environment. That business is still doing well. What we like best is what we said earlier, the performance business is doing particularly well. To your point, the apparel business is a great opportunity for the company.

What Trevor talked about in the presentation, our ability to amplify sports, specifically football, when you look at the great football assets we have in Europe, and you look at each of the countries, we talked specifically France, and we didn't go into depth on the business. When you pick up the French Federation, you look at all the assets we have, whether it's Barcelona in Spain and they win the Champions League, or it's Manchester United and they win the Premier League, we can literally now go anywhere in that portfolio and drive the business and drive apparel and drive footwear. We think that should be a growth business for us.

Don Blair (CFO)

Yeah, you know, first of all, I agree with your observations on athletically inspired apparel. We're seeing our futures strength in that area. If you look at our futures up 15%, that's equally split between footwear and apparel. We think we have a unique position on the performance side of apparel, and that can help us drive, again, a more unique proposition on what we call the express or the sportswear side of the business as well. We've focused, as Eric pointed out, I think in his presentation, a lot more on key items. We've gotten a lot more efficient in terms of focusing on those styles and getting more productivity per style. I think there's still more upside opportunity for Nike as far as that's concerned.

As you look across the portfolio, particularly with Converse and then Umbro as well, and obviously Hurley, there's some major upside on the apparel side. We're bullish. We're very bullish on apparel, and it's obviously a really key part of our growth strategy.

Eric Sprunk (VP of Merchandising and Product)

You know, one call out against that too that I would make, and I think each presenter called it out this morning, is the correlation between, one, performance and sportswear is very significant. Two, having key items both driving growth. As

well as defining the brand, I think you see that when you walk next door and you see the power of strong items that the consumer can connect with, and you keep coming back.

Kelley Hall (Senior Director of Investor Relations)

We'll take one more question.

John Zolidis (Analyst)

Thank you.

Hi, John Zolidis Buckingham Research. Could you just comment a little bit about Nike inventory in the U.S. retail channel? With inventory units up, I guess, 23%, do you think that there is not enough inventory in the channel? Secondly, you outlined and you've got these great programs with your retail partners, the Track Club, the house of hoops, and the field house. Do you think that they have achieved a differentiated assortment of Nike product, or is there still too much overlap out there amongst your key retail partners in terms of the product they have from Nike? Thank you.

Roger Wyett (President of Nike Affiliates)

Actually, I'll try and answer both of those. The inventory levels, I think it's one of the strengths of our company. I think no company in the industry has worked harder or probably had greater success in maintaining what we call a pull market in the industry. Our model is definitely pull. We try to create the demand as opposed to push the product and the inventory into the marketplace. I think we're doing that. We work very closely with the retail partners in terms of monitoring their sell-through, and they work very closely with us in terms of helping them with their inventory and the flow of that inventory. I think one thing we're better at than we've ever been, as Trevor said and as we've talked about with our own direct-to-consumer experience, is the flow of that inventory into the retail partners.

We're much better on the flow, and I think that's working for everybody. We're not just loading a bunch of inventory in at the beginning of the season. We're doing a much better job of flowing that inventory. In terms of differentiated assortment, it almost feels like a retailer question. I would say every retailer in the industry would say, "Hey, we would like to be completely exclusive." I think what we've done a much better job on, as opposed to being just have exclusive product, is let's differentiate the consumer experience. I think all the retail partners have worked with us on the strategy to how do I create a differentiated consumer experience versus let's just have an exclusive shoe. I think that's made quite a difference in the change in their stores, change of their presentation, and certainly the consumer experience.

Mark Parker (CEO and President)

I'll just add to that one and just say that when we think about it, we think about it in terms of distinction. How do you actually allow the retailer to have better distinction in the marketplace? I think that the category offense has actually allowed us to have distinct formats that we can flow product through. Because we stay focused on that consumer every single day, every single season, we can flow a consistent story through those stores. Prior to that, it would have been a hit or miss. I think that what it has allowed us to do is increase the capacity of the marketplace, but also increase the distinction between our retailers, which I think the consumer is then having a better experience. House of Hoops is a great example. We see that in with our Foot Locker.

Obviously, the Track Club that we do with Finish Line, another great example. We've definitely seen that as something that has really struck a nerve with our consumers, and then we're delivering that all the way through our business model.

Trevor Edwards (VP of Global Brand and Category Management)

The last thing I would add is just what we've talked about all day long, that opportunity to leverage both lifestyle versus performance, and being able to complement each side of the closet, so to speak, of the consumer really adds much more accessibility to broader capacity and growth for the Nike brand. It's something that we're focused on.

Kelley Hall (Senior Director of Investor Relations)

I want to thank you all again for being here today. To those of you that participated via webcast, a couple of things. We look forward to chatting with you, the management team and I, next door. We'll meet you there shortly. A housekeeping item, we have copies of the press release that went out across the wire following prepared remarks today. If you want to grab a copy on the way out the door, you're welcome to do that. Thank you.