Q2 2020 Earnings Call
Good afternoon, everyone welcome to Nike Inc.'s fiscal 2022nd quarter Conference call.
But those who want a reference today's press release, you'll find it at http going forward Slash board slash investors Dot Nike dotcom.
Leading today's call isn't that friend CFO , Nike operating segments, and Vice President Investor Relations.
Before I turn the call over to Mr. friends, but me remind you that participants on this call will make forward looking statements based on current expectations and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially.
These risks and uncertainties are detailed in the reports filed with the FCC, including the annual report filed on form 10 Dash cake.
Some forward looking statements, making certain expectations of future revenue growth or gross margin.
In addition, participants may discuss non-GAAP financial measures, including references to constant dollar revenue.
References to constant dollar revenue are intended to provide context as to the performance of the business eliminating foreign exchange fluctuations.
Participants may also make references to other non public financial and statistical information and non-GAAP financial measures.
To the extent nonpublic financial and statistical information is discussed presentations of comparable GAAP measures and quantitative reconciliations will be made available at nike's websites HGTV going forward so much for trash investors Dot Nike dotcom.
Now I would like to turn the call over to Matt friends, CFO operating segments, and Vice President Investor Relations.
Thank you operator, Hello, everyone and thank you for joining us today to discuss Nike Inc.'s fiscal 2022nd quarter results.
As the operator indicated participants on today's call may discuss non-GAAP financial measures you will find the appropriate reconciliations in our press release, which was issued about an hour ago or at our website investors Dot Nike dotcom.
Joining us on today's call will be Nike, Inc., Chairman, President and CEO Mark Parker.
And our Chief Financial Officer, Andy Campion.
Following their prepared remarks, we will take your questions.
We would like to allow as many of you to ask questions as possible in our allotted time.
So we would appreciate you limiting your initial questions to to.
In the event you have additional questions that are not covered by others. Please feel free to re queue and we will do our best to come back to you. Thanks for your cooperation on this.
Ill now turn the call over to Nike, Inc., Chairman, President and CEO Mark Parker.
Thanks, Matt and Hello, everybody.
As most of you know this is my final or quarterly earnings call as Nike CEO .
And while I'm tempted to go right to the results to let another strong quarter speak for itself. There are a few things I want to say right upfront.
I'm excited to take on a new role as executive Chairman remaining a part of the management team and leading the board.
This has been a very thoughtful transition that has been plan for many months.
I strongly believe the best time to make changes from a position of strength.
And our brand and our business are as strong as they've ever been.
We're focused we're competitive or creating a future of our own design.
Most of all the time is right because of the team we have at Nike and.
And of course, John Donahoe himself.
I can't say enough about the incredible people I get to work with every single day.
With their expertise their commitment and their enthusiasm for the business the entire Nike team has been fueling our current momentum.
And because of the depth and the quality of the leadership team, we have at Nike that transition with John will be seamless.
As for John is proven experience and leading global strategy digital Commerce and enterprise technology will be invaluable as we continue our digital transformation.
And his passion for sport his commitment to developing teams and talent and as growth mindset will make him a great Nike CEO .
John will help elevate Nike to the next level and accelerate our strategic transformation and I look forward to working with them even more closely.
With that let's take a look at our Q2 results, where we continue to show the greater focus is the key to accelerating growth.
Overall revenue for the quarter grew 10% up 13% on a currency neutral basis.
The big takeaways from the last 90 days or we're moving or proving that innovation is nike's greatest competitive advantage. The consumer is voting for our brands across the whole portfolio and up and down price points.
The passion for sport and active lifestyles is thriving around the world.
Our international business grew 18% led by greater China at 23%.
And we continue to grow Nike's digital advantage in the marketplace.
The Nike App and the sneakers App are outperforming all other channels driving digital growth of 38% for Q2.
Ill get into the details by sharing some of our Q2 product wins and insights into how our obsession on product and innovation is creating separation for Nike.
Starting with sportswear, we're opening new lanes of opportunity by re imagining our top products.
One example is how we're bringing fresh points of view to some of our most loved iconic footwear with the Air Force one the air Jordan, one and our deep lineup of Air Max.
Our deliberate strategy is to add new styles and colors to the air Jordan, one which allows us to bring one of the world's most popular sneakers to more people offering consumers more choice.
And with women and the Air Force one we're running a nimble keeps city offense through the express lane.
Using local feedback to create and move product to meet shifting consumer tastes.
We'll apply that process to a new classic strategy for women that will ramp up in the back half of the fiscal year.
Two X innovation is creating a continuous cycle of scalable distinct platforms.
For example in this quarter the top three growth drivers in Airmax, where all introduced in the last year.
The Airmax to 70 720, and the 200.
In basketball footwear were leveraging signature athletes to create innovation that matches different styles of play and creates real differentiation across price points.
It starts with new expressions of platforms like zoom air from Unarticulated Cushioning unit in the Kyrie six for quick cutting to a higher stack hide from more responsive jumping with the new Alpha dock.
With the Lebron 17, we created a new cushioning system to propel the games most explosive player during his incredible run with the Lakers this season.
We're seeing very strong sell through in our signature athlete footwear, especially through digital and in China.
Next quarter gives us a number of storytelling opportunities to create even more energy with Chinese new year. The first NBC a regular season game in Paris, and the NVCA All star game in Chicago.
Running continues to create tremendous energy with consumers across both performance and lifestyle.
At Nike, we leverage innovation to help athletes perform better while catalyzing energy and growth and running inspired sportswear styles.
That starts with serving the widest range of runners and over the past two years, we've introduced several performance innovation platforms into the running category, including react vapor fly 4% next percent enjoy rides.
They provide 4% and next percent continue to transform the sport taking over the fields and marathons around the world, including this quarter's sub two hour marathon from eluded to kept Shobi, Indiana and Brinci can say gies women's marathon world record in Chicago.
While jory ride and react continue to fuel the everyday runner early next year, we'll keep the cadence of new platforms going.
In January will start with the Nike react Infinity run, which glens responsiveness and comfort for both efficiency and impact reduction.
And for Tokyo, 2020, we'll introduce a new zoom air running platform that will scale across both performance and lifestyle.
A more complete running off fence also means delivering greater value at core price points.
And a number of initiatives are developing.
Such as our exciting renew platform offering a plush resilient rise similar to the properties of react cushioning.
We're selectively leveraging one of the nikes, most iconic innovations airmax into core price points.
And we're designing women core products from the ground up bringing both unique style and tune cushioning to her per preferences.
In apparel, we delivered strong 10% growth in the quarter and we see a major opportunity ahead.
We are getting better every season at capturing the value of one of the world strongest brands.
Obsessing, the fundamentals fleece T shirts, and outerwear is giving more consumers access to the Nike brand across a range of price points.
And that's being led by seasonal capsules and collections, which encouraged consumers to keep coming back for the latest chapters of storytelling color and prints.
And this formula has been an especially strong driver for women's sportswear apparel, which grew revenue double digits for the quarter.
We've also piloted a new model of launching high heat apparel on the sneakers App this quarter.
We are taking the energy and storytelling, we drive and footwear and amplifying one of our biggest growth opportunities.
We're seeing strong sell through of our apparel collections that we co design with collaborations on sneakers.
The Jordan brand on a wholesale equivalent basis, just earned its first billion dollar quarter, an incredible milestone and just as important is that it was very high quality growth.
Brand is very strong internationally and in North America. The marketplace is healthy and in many cases demand is exceeding supply.
Performance innovation like the Jordan 34 is complementing one of the world's hottest franchises in the air Jordan one.
And women's and apparel continue to reach new audiences.
What's most exciting is we're still in the still in the early stages of diversifying the Jordan portfolio and Weve continued the momentum into Q3 with a significant holiday launch of the Jordan 11 bread meeting demand for one of Sneaker culture is all time favorites at an incredible scale.
So as we look ahead, we're about to enter a hyper intense cycle of new product introductions with the Tokyo 2020 games and the football Euro Champs on the horizon.
Both will be a springboard for new innovation that will help define the performance anesthetic of Nike product for years to come.
Euro Champs will be another great catalyst for EMEA apparel in the back half of the year.
For the Olympics in Paralympics will be revealing the specifics about our explosive lineup next quarter.
But you're going to you can expect to see the next air Revolution with new approaches to zoom air and a renewed vapormax platform.
A celebration of women's basketball like never before highlighting the opportunity we see to grow the women's game and our business.
And our teams using the world stage of Tokyo, 2020 to elevate sustainable design at an incredible scale.
Across the board our product teams are proving that innovation is nike's greatest competitive edge.
We're turning athlete insights into breakthrough innovation.
We're offering more choice on the industry's top icons.
We are delivering more complete and more productive assortments.
And we're being opportunistic with the consumer in real time.
Another way, we continue to create separation is through nikes digital advantage, our digital commerce revenue grew an impressive 38% in Q2.
Powered by an outstanding performance during our most important holiday moments in November .
For Black Friday digital sales grew over 70% in North America and broke records for the weekend across many of our metrics, including our highest week of member engagement ever.
Buying members also grew 45% versus last year.
We also saw phenomenal success in a manner with an increase of nearly 50% in demand as black Friday week grows in importance to the European consumer.
Singles Day showed the current strength of our brand and product portfolio with the Chinese consumer.
Through singles day, we created demand generating nearly half a billion dollars in revenue.
We strengthened our relationships through Nike, plus adding 3 million members.
We served our consumer faster delivering 20% of the 11 Lebron orders the same day.
And we finished as the number one athletic athletic brand on T Mall.
China is in many ways the world's most compelling digital marketplace.
And while the digital share of the business in greater China is larger than any other geography for Nike, we still see so much potential ahead.
At the end of Q2, we added the Nike App to a powerful portfolio in China that includes Nike Dotcom sneakers, NRC NTC and our branded experiences with T mall and we chat.
The Chinese consumers already telling us they are excited about the Nike App download again 1 million times during launch incredibly it's already the number one shopping app in China.
Of course, we continue to stay engaged with all of our stakeholders in greater China monitoring trade conversations and the state of consumer across the region.
Overall, we feel very good about.
The sell through of our product in the health of our marketplace.
About our support of the growing community of everyday athletes as well as China's top leagues and federations.
And the immense opportunity to create tailored experiences for the Chinese consumer.
We've talked a lot about the scale of the investments we've been making to fuel our digital transformation and there are many components.
Industry, leading consumer retail experiences that merge online and offline.
New operational capabilities and powerful partnerships.
And all enabled by the digital talent, we've added through five recent acquisitions and investments in our teams.
The common thread to these work streams is that they put the consumer at the center.
There are all designed to reduce friction and create a more direct connection with our customers and ultimately invite them to become members.
Membership is the sharp point of our growth.
For the quarter sneakers, App grew strong double digits, the Nike at more than doubled and both apps now make up over one third of our digital revenue.
And active users for our apps are growing almost triple double digits.
The Nike App at retail continues to be one of our greatest opportunities to create scale as we pair the app with physical retail across our owned and partner doors.
Through the Nike App at retail personalization and convenience move to another level.
Inside the store members can unlock tailored offers based on their past engagement with Nike.
And shop at their pace on the retail floor scanning products for information and checking out on their own.
Nike is also changing the experience of finding product and how it's delivered.
Members can reserve products online and have a waiting for them at their nearest store. So they can try it on first.
Or if they can't find a product they want new investments in RF I'd will enable the consumer to instantly track one another one down.
Somewhere else in the store online or potentially in another retail partners channel.
We have a culture of testing and it a rating new retail concepts very quickly.
And we're in the early stages of scaling some of our best ideas around the world and our own doors and with our partners.
For example, our first test of Nike live internationally opened in Shelia, our smallest Nike live during the world, but serving millions through the power of digital.
Nike is not only deeply committed to using our digital advantage to make the consumer experience better. We're also using data science to inform how much product, we supply and where.
Through our acquisition of select.
We're applying and developing new unique algorithms to make us better attuned to what the consumer is telling us.
We're leveraging data that includes past and present consumer interest in products and purchasing signals to better predict demand. So we can decide how to stage inventory in our distribution centers and our stores in different ways.
For singles day, we shipped product from over 200 stores instead of Dcs to meet the needs of consumers faster and more profitably.
Bringing science to the art of retail remains one of Nike's greatest opportunities.
Before handing it off to Andy I do want to take a moment to recognize you our shareholders.
Many of you have been invested in Nike for years.
Even decades.
And I greatly appreciated your engagement and your long term focus.
As you know I tend to think more about what's coming then reflecting.
But my time as CEO really has been a humbling experience.
Im leaving this role with so much optimism for the future of this company.
Sport continues to inspire and move the world forward incredible ways.
Our brand is connecting deeply with consumers everywhere.
Our innovation is helping athletes proved that there are no limits.
We are challenging the conventions of retail at every turn.
We're growing our biggest businesses and focused on our greatest opportunities.
And we're bringing tremendous talent into Nike to add to our already deep bench of leaders.
It's clear that sport is thriving.
That Nike has the right people.
And the right plan.
What's great is I won't be a spectator to all this success.
I will be part of the team that's creating.
So with that for the last time I'll say thank you.
And here's Andy.
Hello, and happy holidays to everyone on the call first I want to thank and recognize Mark we've all been fortunate to be guided by marks extraordinary vision and leadership as Nike's Chief Executive officer over the past 14 years.
I've told Mark this personally is the most creative inquisitive and frankly also the most demanding leader for whom I've ever worked and at the same time. He is the most patient thoughtful and balanced.
We will all continue to benefit from Mark's leadership as Nikes executive Chairman.
We're also extremely fortunate to have John Donahoe, joining us as Chief Executive Officer.
Few companies are guided by an inspirational founder.
As well as a 14 year, former CEO and 40 year veteran of the company.
And now John Donahue, John is clearly a proven CEO brings extraordinary people leadership and talent development experience as well as deep expertise in strategy consumer digital technology and enterprise technology.
This abundance of strong leadership is yet another competitive advantage that we enjoy at Nike.
And this plan full transition is happening as nike's momentum is accelerating driven by the increasingly deeper execution of our consumer direct offense by our talented teams around the world.
As we are still in the early innings of our digital transformation now as Mark said is the perfect time for John to be joining and leading our team.
Simply put I'm extremely excited about future for Nike.
Before we talk more about the future, let's focus on the present for just a few moments in Q2, we delivered revenue growth of 13% on a currency neutral basis.
Our strong topline growth was amplified by gross margin expansion and significant SGN a leverage the result was EPS growing 35%.
There are three key strategic and financial themes that stand out as we reflect on our strong Q2 results.
First as we've said before Nike is a growth company growth is how we measure the value we create for consumers and delivering strong sustainable growth at scale is how Nike creates extraordinary value for shareholders over the long term.
Second.
While we will continue to prioritize investments that drive focused growth and build capabilities to differentiate Nike. We're now also increasingly editing and divesting ward deliberately and other areas.
Third we are extending nike's digital advantage.
And we are positioning Nike for even greater competitive separation over the long term.
As we transform elements of the consumer journey, our individual investments will have an exponential impact on nike's long term growth profitability and returns in the aggregate.
I'll provide just a bit more context on each of these themes first Nike is a growth company in fact, our rate of growth in constant currency terms as exceeded the long term financial model that we communicated our investor day in October 2017.
More notably our growth has been profitable capital efficient and broad based across our entire global portfolio. That's because our growth is being fueled by focused strategic execution of the triple double by our teams around the world.
At our Investor Day, we set our goal was to double the percent of revenue generated by recently introduced innovation platforms. In other words, we would two X innovation.
As of this quarter, we have in fact more than tripled innovation as a percent of revenue.
And we're not slowing down.
We will sustain this level of innovation driven by the incredible breadth and depth of our innovation pipeline in particular, all that we have in store for the Tokyo 2020 Olympics.
Our strong growth also continues to be fueled by an increasingly more direct connection to consumers in the marketplace. Nike direct grew 17% on a currency neutral basis in Q2 led by Nike digital growing at 38% our digital growth was driven primarily by the Nike App and sneakers out.
With both now live in over 20 countries.
In Q2, we also opened two Nike lives stores in long Beach, California, and should be a Tokyo, which leveraged digital to better serve members within a more moderate sized and efficient physical retail format.
Our growth also continues to be balanced across all Nike brand geographies. That's because we are executing our offense first and foremost in the 12 key cities and 10 key countries with the greatest potential impact our growth in Q2 in those key cities and countries continues to.
Over index the broader market.
That brings me to my second key takeaway our investments continue to be focused on the areas, where we see the greatest potential to drive growth.
And on building capabilities that will truly differentiate Nike at the same time, we're now increasingly editing and divesting and other areas.
Again at our Investor Day, we told you that we would focus and invest in the following areas innovation speed and direct.
Our priority categories, and the 12 key cities and 10 key countries that would deliver over 80% of our incremental revenue growth over the five year horizon.
Over the past two years that is precisely what we have done and our results are giving us even greater confident confidence that we're investing in what matters most.
As we all know investing in the future always comes before editing and divesting legacy operating models, but we are now increasingly doing both we are editing and shifting how we deploy resources within our marketplaces.
Across our categories and geographically.
While we're investing in differentiated Nike brand experiences owned and partner we are also more efficiently managing.
The broader retail marketplace, leveraging digital tools, such as our Nike Dot net business to business sales platform.
As a result, we're delivering strong overall revenue growth despite intentionally flat to declining sales in undifferentiated multi brand retail.
Quite frankly, we could sell more in the short term in these undifferentiated channels, but our focus is on building a more compelling marketplace for the consumer and unbreakable relationships with Nike members.
In early Q3, we also sold the Hurley brand, which has become one of the leading brands in surf apparel.
Early will benefit from new Ownerships focus on the serve category.
Our sale of early will further sharpened nike's focus and investment on the key categories that will drive our long term growth.
Going forward, we will refine our operating model with respect to dimensions of our business that has historically been less profitable and or have lesser growth potential.
For a bit of context today, we currently operate essentially the same business model and over 45 countries.
One of our many competitive advantages in Nike is that we have unrivaled resources.
I'm more focused and efficient we are in deploying those resources. The more we will extend nike's lead with the consumer and the greater the value we will create for our shareholders.
Finally, the third key takeaway from the quarter is that we continue to expand nike's digital advantage.
As we systematically transform individual elements of the consumer journey the more exponential the impact is on our long term growth profitability and returns on invested capital.
In Q2 more than half of our total digital traffic came from logged in numbers.
Nike member is a consumer who has chosen to create a profile with Nike.
Even ingest these early stages of digital transformation at Nike The average order value for members is significantly greater than for non members.
And we're seeing revenue growth from members continue to expand based on two factors one strong rates of growth in new members and to greater main member engagement year over year as measured by monthly active users.
As we consider investments and transforming how we operate we always look to our consumer onest and more specifically our members and assess where we have the greatest potential to improve their experience.
It starts with digital demand sensing our acquisition of select accelerates our ability to better predict the rights supply of products that consumers love down to the style color and size selects tools will also enable more accurate for positioning of inventory in stores online and in our distribution.
In centers.
Note that select also brings other tools that improved pricing and markdown efficiency.
As consumers shop, our investments in connected inventory provide our store employees near 100% accurate visibility into the precise location of specific inventory whether that one pairs in the stock room or elsewhere on the floor at a partner store on one of our distribution centers and.
Thanks to our investment in and vertex Nike fit well give consumers confidence that they are getting the right sizing up specific style.
Our investments in data and analytics help us learn from each of these consumer experiences and translate those learnings into for example, curated content product offerings and more personalized digital experiences for members.
And as they say that which has measured improves our acquisition of zodiac allows us to assess real time, how each new offering impacts engagement and consumer lifetime value.
Transforming the consumer journey also has significant financial impacts we will capture greater demand at the moment of truth, we will have stronger full price sell through and more efficient markdowns will have fewer days in inventory and will have greater member retention and repeat buying.
This digital transformation is beginning to impact our results in fact, our constant revenue growth and margin expansion, excluding foreign exchange headwinds over the past two years has exceeded the financial model, we communicated our investor day.
And we believe that building on our digital advantage is certain to further extends Nate extend nike's lead and amplifier long term growth potential.
Before providing more context on our outlook I'll first reflect on the details of our financial results overall and for our key operating segments.
Nike Inc. revenue grew 10% in Q2 up 13% on a currency neutral basis, reflecting strong balanced growth across the portfolio led by greater China and digital.
Gross margin expanded by 20 basis points in Q2 as strong gross pricing margin, which is essentially average selling price net of average product costs and strong growth in higher margin Nike direct was partially offset by the impact of new tariff implemented in September strategic supply.
Chain investments and foreign exchange headwinds.
SGN, a leveraged as compared to revenue growth growing just 6% in the quarter as investments in digital capabilities were partially offset by productivity within our operating overhead efficiencies within our demand creation spend and our decision to defer demand creation to the second half as we.
Ramp up to Airmax day, the NBC Allstar weekend European Championships, and the Tokyo Olympics.
Our effective tax rate for the quarter was 10.7% compared to 15% for the same period last year due to greater stock based compensation benefits.
Second quarter diluted EPS was 70 cents growing 35% versus prior year.
Inventories were up 15% in dollar terms, 10% in units, reflecting strong consumer demand globally strong growth in Nike direct and a higher rate of on time factory deliveries versus the prior year.
With that let's turn to our reported operating segments.
In North America, Q2 revenue grew 5% on a reported and currency neutral basis.
Nike digital grew 32% in the quarter fueled in part by a strong black Friday.
Overall growth was fueled by those dimensions of the marketplace that we're transforming in particular, Nike direct and through differentiated wholesale partners like foot locker JD finish line index.
We continue to intentionally rightsize undifferentiated dimensions of the marketplace. We have strong momentum in North America, which makes it the ideal time to affect this transformation.
Our key city focus is also fueling north America's transformational growth, New York and Los Angeles are outpacing the broader market.
In New York for example, Nike direct is already well over 50% of our business and digital is already well over 30% penetrated.
We see our momentum continuing in North America over the second half of fiscal year 20 with comparable growth.
In the strong mid single digit range that said our reported rate of revenue growth will not be comparable year over year revenue growth in North America will be negatively impacted in the short term by our value accretive sale of Hurley.
This transaction will create a 2.8 roughly two point unfavorable comparison on North America revenue growth versus the prior year unadjusted.
Which equates to roughly one point for Nike Inc. that said this is accretive from a capital deployment and profitability perspective.
And our North America business on a comparable basis remained strong and we're right on plan.
Now, let's turn to EMEA, where the Nike brand is on fire and continues to take significant market share.
In Q2 revenue in EMEA grew 14% on a currency neutral basis with double digit growth in most key categories led by sportswear and Jordan.
Nike continues to be the number one brand in all of our key cities within a man.
To deepen our brand connection with consumers, we launched two powerful locally relevant campaigns and demand Q2, we launched a kids focused just do it campaigns celebrating girls and on the back of that campaign, we saw our kids business growth strong double digits.
We also launched a campaign around the Thirtyth anniversary of the blend wall coming down with a focus on the power of sport to unite notably our increasingly localized approach has resulted in Nike, becoming the number one footwear market leader in Germany.
Our women's business also grew faster in EMEA than any other geography in Q2.
Through our express Lane, we brought the T 100 women's apparel pack to market in less than 120 days from initial consumer insight.
The products sold that immediately through Nike direct basis and Zalando.
On that note Nike digital in EMEA grew 27% in the quarter faster than any other dimension.
We also continue to expand our brand accretive partnership with Alonzo, including Rolling out a connected inventory pilot to seven countries based on the strong incremental revenue generated from the initial launch in Germany.
We have extraordinary momentum in M&A, and we expect to extend our lead fueled by the Euro chance and the Olympics over the second half of fiscal year 20 and into fiscal year 21.
In NPL, a revenue grew 18% on a currency neutral basis fueled by growth in Korea and Japan.
Nike digital and APC law was up 67% in Q2 and continues to lead all dimensions of growth.
We're also putting the Nike brand in the path of more consumers through our partnerships with digital platforms, such as those of town and Flipkart.
These partners are affording the Nike brand and our product premium positioning while also serving as an onramp to Nike membership.
In Q2, we also opened our first international Nike lives store integrated Tokyo next to one of the busiest train stations in the world.
At the same time, we leveraged our express lane to create a unique air force one inspired by the should be a neighborhood and launch through the Nike sneakers AFE.
Finally, our running business has tremendous momentum in Japan, Nike's market share and running reached a record high in Q2 led by the success of the vapor fly 4% and next percent.
We're excited to build on this energy with the launch of new styles like the Nike react Infinity run next month and the strong portfolio of innovation to come around the Tokyo Olympics.
Now, let's turn to greater China. This past quarter, we delivered 23% currency neutral revenue growth in greater China, we saw strong double digit growth in every key category and every dimension of the market.
Nike digital once again led our growth at plus 44% on a currency neutral basis fueled by a record breaking singles day that exceeded our own ambitious expectations.
We continue to deliver strong digital growth in greater China. Despite only having just launched the Nike App earlier this month.
That is one of the many reasons, we believe that we had while we have great current momentum in China, we are still far from realizing our full potential.
While we're of course very mindful of the Geo political dynamics in greater China. The Nike brand continues to deeply resonate with consumers and our growth continues to be strong and sustainable.
We are proactively managing inventory in the Hong Kong market based upon the more recent declines in Hong Kong retail traffic.
These actions will create a short term headwind on what will remain a very strong rate of growth for greater China.
With that.
I will now share outlook.
On a currency neutral basis, our outlook for the full year continues to improve.
For the full year, we now expect currency neutral revenue growth approaching the low double digit range.
Even after taking into account the non comp impact from the sale of Hurley.
With continued geopolitical volatility we expect foreign exchange to remain a two to three point headwind on reported revenue growth.
Taking into account all of these factors, we continue to expect high single digit reported revenue growth for the full year.
We also continue to expect gross margin expansion within the 50 to 70 basis point range and SGN AG rowing in the high single digit range, even including the impact of acquisitions.
We expect our effective tax rate to be in the low to mid teens.
And for La Z net of interest expense, we now expect roughly 100 to 150 million of income for the year.
Based on quarterly volatility, let me provide more context on our Q3 outlets.
We expect reported revenue growth in Q3 to be in the high single digit range, albeit at the very low end of that range. Our continued strong currency neutral revenue growth will be partially offset by roughly two points of foreign exchange headwinds and the non comp impact related.
To the sale of Harley.
But definitely Q3 reported revenue will be inline with our reported revenue growth in Q1.
We expect gross margin in Q3.
To be flat compared to the prior year.
We expect continued strong underlying product margin expansion, reflecting the strength of our product pipeline.
However that expansion will be largely offset by tariffs in North America and investments in our supply chain.
In addition, foreign exchange headwinds within gross margin will be more inline with what we reported back in Q1.
The impact of geopolitical trade dynamics on FX and more recently tariffs do create quarterly anomalies that said as we all know one quarter or one data point does not equate to a trend over the past two years, our gross margin expansion has significantly exceeded.
Ed our goals.
But for the as dynamics and again for the full year.
We continue to expect 50 to 75 basis points of gross margin expansion.
We see continued strong fundamental expansion in our margin fueled by our strong product pipeline and the higher rate of growth and Nike direct.
In Q3, we expect SGN a growth.
In the low double digit to low teens range driven by our decision within Q2.
To shift demand creation into the second half in order to amplify the MBA Allstar weekend European Championships, the Tokyo, Olympia Olympics, and our launch of innovative new products, we expect our effective tax rate to be in the low to mid teens range for La Z net of interest expense we expect in.
Come in Q3 to be roughly $50 million to $75 million.
Q2 was another strong quarter fueled by execution of the consumer direct offense by our unrivaled team around the world.
That said.
As Mark will continue to remind all of US there is no finish line. We are still in the early stages of this transformation at Nike with tremendous growth potential ahead of us I could not be more excited about the future for Nike with that we'll now open up the call for questions.
In order to ask a question you will need to press star one on your telephone to withdraw your question press the pound or Heskey. Please standby will be compiled accumulate roster.
Our first question comes from Bob Drbul with Guggenheim. Your line is open.
Hey, good afternoon and Mark.
Good luck on the next chapter and thanks for all of the.
The help over the last numerous years, it's been a lot of fund.
Thanks, Bob appreciate that Yep.
[laughter].
I guess the first question I have is if we could just talk about in the quarter, but can you talk a little about the north American apparel market, and you and sort of the performance and or the outlook and sort of some of these assumptions there's been a lotta.
Press recently around the MLB.
Partnership that you are launching right now.
Yes, I'll take that when Bob.
Overall start just overall with our apparel business, we've got incredible momentum in the apparel business overall.
Globally apparel grew 10% in the quarter and frankly, we think we have much greater opportunities ahead that we havent, even yet capitalized on and we've spoken quite a bit about that our international geographies growth has been phenomenal sportswear in Jordan.
Our leading the growth lifestyle apparel for both men and women.
In North America in particular, the rate of growth in the quarter was impacted by prior year comparisons. So in the prior year. This may sound like not that significant impact, but it actually was the shift of Lebron James to the Lakers and the initial impact from the sales is just jerseys was signal.
Again, but for that the growth rate in North America would have been more in the mid single digit range.
For context, what I would tell you is.
At that in the prior year North America apparel actually grew 10% in part aided by that comparison, so we continue to feel.
One both great about the state of our apparel business and brand in North America, but at the same time nowhere near satisfied in terms of the opportunities ahead that we have.
To really drive more epic growth in apparel.
Got it Okay, and then if I could just ask a follow up for Mark I'm sort of closing question for you.
With all the attention on the vapor fly next percent I was just wondering can you share to share with us how much you shaved off your personal record or personal best with the pair of shoes that you've been conduct.
Okay.
Well I can just tell you that.
The time it takes me to walk across the Nike campus here at headquarters as dropped by at least 4% [laughter] feeling good about it really did.
Thank you very much good luck to thank you Bob Thanks, Bob Okay, operator, we're ready for the next caller.
Your next question is from Paul Trussell with Deutsche Bank. Your line is open.
Okay.
Good afternoon, great results in my congratulations as well tomorrow.
I wanted to touch on gross margins.
On a number of puts and takes going on.
Maybe just touch first on what transpired in the second quarter, especially relative.
To your expectations, and maybe give a little bit more detail around the update a kind of third quarter in second half guidance. Thank you.
Sure I'll start with Alan Paul in the quarter as you know our gross margin expansion landed about as close as we've ever been to the guidance that we've provided so.
At the same time, there are some really important highlights to call out within our margin.
Our gross pricing margin as we call. It so thats our average selling prices that are product costs were very strong we had strong average selling price increases thanks to the strong product pipeline that we have.
And the innovation that we've been bringing to market.
Of course, some of the other impacts in the quarter include tariffs tariffs in the quarter were roughly 40 to 50 basis point impact.
Obviously pretty significant if you were to add that back alone.
So thats the second impact I'd call out we also continue to make investments in our supply chain.
A little bit of detail there were expanding our distribution center capacity in the Memphis, and Mississippi areas to increase both capacity and speed, especially with our growing digital business and Omnichannel strategy with online to offline services.
We are expanding some apparel distribution capability in EMEA, which again is reflective of just the great opportunity. We see ahead in apparel.
And.
And the momentum that we have in that market.
Tokyo in Mexico City are also areas, we're investing in our supply chain, we've invested more broadly across our entire supply chain and putting RF I'd in our product. We now have RF ideas about 100% of our footwear about three quarters of our apparel and for a little contacts the benefits of that are still to come so the RF ideas in the product.
So the ability to scan and the distribution centers is significant with at least eight of our distribution centers, having that ability. We're still in the early stages of rolling out the ability to leverage that in stores, but it's happening.
But more in the dozens of stores.
Fax was an impact although thats one of the things I'll end, there by saying if there are a lot of puts and takes within margin in any given quarter and I would tell you not to focus on a quarterly margin expansion result, especially in these times as indicative of the trend the real trend is strong gross pricing margin.
The shift toward Nike direct.
The ability to capture more full price sell through et cetera.
But if I was to give you one of the more distinctive variances between Q3 and Q2 FX was in maybe to 15 basis point headwind zone in Q2, and we see the impact of FX being more in line with what we saw in Q1, which is say roughly 50 basis point.
Yes, so that alone more than equates for that the the difference between what we delivered in Q2 and guidance.
That's helpful color. Thank you.
Maybe turning now to SGN a.
Just maybe talk a little bit more about the timing shifts and just also how should we be thinking.
Bigger picture as we move towards all of these key sporting events, especially.
The excitement around Tokyo 2020, as it relates to.
Demand creation expenses.
And how maybe some of that will be offset by where you're fighting some efficiencies.
And the operations. Thank you.
Yeah, I guess, what I'll start by saying is if you reflect on Q2, we both had stronger revenue than we expected going into the quarter and obviously what you can infer is we felt less of a need to spend demand creation in the quarter to drive it we've got an incredibly strong pull market.
It.
And and just had and have great momentum and so in the spirit of realizing we've got unrivaled resources.
In this industry.
It's even more important than when we see an opportunity to really leverage those resources in a focused way, we make decisions and shift real time. So we looked at the situation and said, we didnt need that demand creation in Q2, we want to save that powder, so to speak for the big events and the big launches.
That we have in the second half of the year and going into fiscal year 21, So thats really the biggest driver of that shift in SGN a.
To your question about Tokyo.
Marks probably the best person to to give color on how excited we are about the product, but you can infer from us wanting to shift.
Part of demand creation is getting our voice out there and communicating the benefits of our product and how excited we are in.
And and we in fact, our that's why we've deferred that demand creation.
Yes, I'll just quickly add that the excitement around.
Tokyo is tremendous here at Nike in terms of whats coming in the innovation pipeline.
I have mentioned the performance product that we have coming for Tokyo, both in footwear and apparel.
And then we're leveraging that across sportswear.
And I think for men and women. So it's really a complete off as planned around Tokyo, and we think we have to Andy's point a lot to leverage.
With that demand creation spend this is a big moment for US. This is every four years and we really rally around this event in a major way so the impact.
The revenue you're going to see in the in the year, but you're also going to see it carry on an influence our potential going forward.
Okay, operator that has gone product. Thank you.
Thanks, Paul Yordan.
Your next question comes from Alex moments with Goldman Sachs. Your line is open.
Good afternoon, thank so much for taking the.
The question here. So first question is on.
If America footwear.
Strong acceleration in that category in the region. During the quarter can you go into a little bit more detail on what's driving that from a.
Styles of channels perspective, and perhaps any feedback from your partners on the on the new styles at a selling into that channel.
Yes, I speak to complete offense quite a bit and.
The second half of the fiscal year, we're really.
Trying to dial up our offense, particularly in the core.
Product footwear product innovation space and some of the new styles. We have coming there are I think will give us a real boost in the second half the reaction from the retailers has been very positive.
In terms of some of the new styles, we've got including.
The react.
Product that we have coming it's a new.
New version of react called Infinity react, Ron which is actually a higher performance shoe that we think will give us more access.
To that core runner.
We have nucor running styles coming in.
Underneath that as well.
Both in mens and womens styles, we also have airmax coming down into the core.
Hi, strange selectively leveraging the Airmax platform.
We have others. If you look at some of the other styles. We've got on the sportswear side, we've got Duncan.
Blazer.
The.
Jay.
Product too so the MJ Air force or I'm, sorry, the air Jordan one.
Our Air Force one continues to be actually very strong for us we're continuing to integrate new styles on both those franchises.
And with the addition of the blazer in the dock in the mix, we think that that will continue to create some good momentum for us on the footwear side. So it's really had a more complete offense for the second half on footwear with a big emphasis on core for us, particularly on our own channel in the digital direct space. So we think thats going to be a good boost.
For us.
Awesome Supercluster. Thanks, very much second question. If I may is on Columbus really strong momentum in not brown now for another quarter can you talk about what's driving this growth.
Growth rate that and then it seems to be.
They focused on international regions is there any.
Anything you can share on that.
Outlook.
The North America, and whether that Kim.
Meet that meet the growth rate seen elsewhere.
Yes, a much of the growth in Congress is being led.
By International specifically Asia Pacific really led by China.
And then we're also seeing strong performance in EMEA.
And much of that also is driven by digital so we're seeing.
Incredible momentum for converts really starting to build in those markets.
We have some gaps to close in North America.
I think will we are continuing to differentiate our product line beyond the Chuck and I think that will creates more opportunities for us in basketball or looking at running in some other dimensions of the calm horse cover slower portfolio apparel as well we are seeing by the way strong growth in North America.
For conversations in the digital space. So we think thats a sign of.
Some optimism for us for converse.
In North America going forward.
And I think the expansion of our digital.
Platform for converse is going to be a driver globally.
Certainly led currently by China, but we'll start to see that happened more and more in North America and for Europe , and I'd just add one thing Mark spoke about on adding diversification relative to the Chuck business.
We've got some real momentum within the Chuck franchise in particular, driven by our style called the Chuck 70, which is growing really strong double to triple digits.
In all geographies in fact, it's already a pretty significant percentage of total Chuck business in markets like China and elsewhere.
And it's ramping up quickly in the U.S.. So we see great energy in terms of as Mark would say, providing more choice and differentiation within a style that has the kind of expand expansive opportunity that the jackass.
And that is a more premium version of the Chuck.
Which also kind of raises attempt on apps the opportunity to expand on that franchise.
Thank you okay. Thanks Albert.
Thanks next question operator.
Your next question comes from Omar site with Evercore ISI. Your line is open.
Yes, Thanks for taking my question Congrats on the Great run Mark.
Thank you.
Yes, so while I have a great. So I'll have you and are reflective mood I'd love to hear thoughts on two things number one.
The decision to terminate the Amazon trial, maybe you can get into little bit into the why and what might get Nike the Nike brand to come back.
And the second question I have.
Has the Nike Inc. CEO and having seen the various evolutions of the portfolio do you think Nike is going to be a multi brand or a mono brand company 10 years from now.
Yeah.
Oh Gee on one hand, you're talking about kind of setting somebody legacy assets and Youve divested Hurley.
But on the other hand, you're talking about the are you can do describing emanating kind of separate African we enable capabilities for backend or frontend. It feels like maybe this opportunity to plugs.
Great brands in your platform.
Leverage what you've built so would love your kind of musings on those two topics. Thanks, yes.
Well we have.
We have clear framework for partners in the digital space.
And what's guiding us is really to be in the path of the consumer in a way that's really right for the brand.
We continue to see just on a macro basis, so great momentum with our partners.
Including partners like Instagram at Google and T Mall, we chat.
So brand right is really what's important year.
And that's building those relationships with the consumer through better presentation.
I think elevated authentic consumer experiences in the on whatever digital platform.
And this makes this means ensuring that we have an environment, where the consumer can be certain that they're buying authentic nike product from authorized retailers. So.
Thats been our focus is to really be up to elevate the brand strengthen the connection with the consumer much like we do with the differentiated wholesale strategy.
So thats kind of led us to our decisions in terms of.
Moving forward.
We have your your second question on multiple brands are one brand motto brand.
I would say pretty convincing later confidently that we are we will be a multi brand company.
In the future.
We have multiple brands now Nike Jordan converse.
We see tremendous upside potential with those brands we're in the early stages of.
Strengthening our portfolio and expanding our portfolio within the Jordan brand.
Obviously sportswear is very strong performance basketball was more upside other performing categories, there's upside apparel women's.
International growth. So there is tremendous growth opportunity within that Jordan.
Brand for Nike and then converse Likewise I think it was we just talked about as we diversify that portfolio strengthen our position in North America.
Tremendous upside.
For the Congress, Brad and taking some of that pressure off of Nike to be everything everybody I think thats important.
And then we can leverage our capabilities our digital capabilities for example across that portfolio.
And then I think as we transform our operating model.
Will enable more and more opportunity for the broader Nike portfolio.
Okay.
Congratulations on job well done.
Thank you Omar Thank you very much operator, one last call before we wrap up.
Our last question comes from Matthew Boss with Jpmorgan. Your line is open.
Thanks, Nice quarter end, Mark congrats on that transition.
Thank you.
So with fit with five straight quarters of double digit constant currency revenue growth I guess, maybe at a higher level Mark what do you see that's been driving the upside versus your high single digit growth algorithm and what's your confidence in the multi year product and innovation pipeline since it to sustain the stronger momentum.
Well I can honestly say have never been more confident than I am right now what's driving those results. Those consistently strong results are not only the innovative product that really is where the consumer boats. Ultimately so the products has to be strong but.
Complete offensive products footwear, and apparel up and down the price points across the categories mens and womens I think we've been driving a more complete offense and much of that has been driven by the innovation that represent some much more of the percentage of our revenue growth and it had even just a few years ago. So that's that's.
Absolutely critical and then of course, I will say, we get used for saying digital transformation.
As much as we do but it's clearly driving some incredible results for us and I sit here today firmly believing and more confident than ever that that will continue to drive great opportunity and upside for us and I'm excited to have John come in India part of accelerating that transformation for us going forward.
It's going to be to me a win win situation between the incredible team we have on on on the field today. John was his expertise my guidance I'll continue to focus on things that I think a really important for the company.
Particularly on the innovation design product marketing space I think theres.
Those continue to be.
Core fundamental driving.
Principles for Nike and that's that's that's exciting for me going forward and then lastly, I'll say is.
What's really driving.
All of this all the above is the team that we have here, we have incredible talent at Nike.
Not only individual talent in in across the company the functions the geos the categories.
But the collective team and how that team comes together, it's really the chemistry of the team is one of those things it doesn't get talked about a business very often but we have great chemistry, and incredibly competitive driven team and that ultimately is what's going to drive the success of any company and that's certainly the case here at Nike.
That's great well congrats.
Congrats again on the quarter actually you Mark.
Thank you thanks, Matt and thanks, everyone for joining US today, we look forward to speaking with you next quarter happy holidays, everyone.
Ladies and gentlemen, this concludes todays conference call. Thank you for your participation and you may now disconnect.