Nike, Inc.

Good afternoon, everyone. Welcome to Nike Inc's fiscal 2020 third quarter conference call. For those who want to reference today's press release, you'll find it at http://investors.nike.com. Leading today's call is Matt Friend, CFO, Nike Operating Segments, and Vice President, Investor Relations. Before I turn the call over to Mr. Friends, let me remind you that participants on this call will make forward-looking statements based on current expectations. and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in the reports filed with SEC, including the annual report filed on Form 10-K. Some forward-looking statements may concern 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 non-public financial and statistical information is discussed, presentations of comparable GAAP measures and quantitative reconciliations will be made available at Nike's website, http://investors.nike.com. Now I'd like to turn the call over to Matt Friend, 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 2020 third 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 one hour ago. or at our website, investors.nike.com. Joining us on today's call will be Nike Inc. President and CEO, John Donahoe, and our Chief Financial Officer, Andy Campion. We are sitting together in a conference room six feet apart, practicing social distancing. Following Andy and John's 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 two. In the event you have additional questions that are not covered by others, please feel free to recue, and we will do our best to come back to you. Thanks for your cooperation on this. I will now turn the call over to Nike Inc. President and CEO, John Donahoe.

Thanks, Matt, and hello to everyone on the call. Over the last quarter, Nike delivered 7% currency-neutral revenue growth. despite the material impact from COVID-19 in China. This performance reflects the strong business momentum we had in Q3 across all of our geographies and categories. But let's take a step back. We're living in an unprecedented moment. And like never before, each day requires a close inspection of a very dynamic external environment and a clear determination of how we will respond. So let me tell you what we've seen over the past two months. When COVID-19 began to aggressively spread across China in late January, our top priority was to protect the health and safety of our teammates and our consumers. We immediately began closing stores. And as of 45 days ago, we had closed more than 5,000 stores in greater China, while the remaining open doors were operating with severely reduced hours. Not surprisingly, retail volume in China plummeted. But we acted quickly and decisively, leveraging our diverse sourcing base and digital capabilities to manage the business with flexibility and shifting our inventory to serve consumer digital demand. At a time when people were confined to their homes, we moved swiftly to leverage our digital app ecosystem and Nike Expert Trainer Network to inspire and support consumers across China to stay active and connected while at home. As a result, our Nike Training Club workouts in China saw an extraordinary rise in sign-up and engagement. In fact, our weekly active users for all of our Nike activity apps were up 80%. by the end of Q3 versus the beginning of the quarter. And here's what happened. The strong engagement of Chinese consumers with our activity apps translated into strong engagement with our Nike commerce app. As a result, our digital business in China grew more than 30% and maintained strong momentum throughout this challenging period. A powerful statement of Nike's agile problem solving in times of disruption. Then approximately 30 days ago, we began to gradually reopen stores in China. People got back to work, and retail traffic began improving significantly. Today, nearly 80% of our stores in China have reopened, with more coming back online every day. In fact, just last week, we reopened our first store in the Wuhan area. And the results are encouraging. Our digital business in China has accelerated even further over the past month, and we are now seeing double-digit increases in retail traffic week over week, with some stores having already returned to prior year levels. Credit for this response goes to Angela Dong, who leads our Greater China Geography and her talented team of more than 1,600. I spoke with Angela two nights ago. And she's been telling me about the positive sentiment consumers in China are feeling for Nike. And I can't overstate how impressed I am. It's become quite clear to me that when Nike says we are a brand of China for China, it's really true. And it's no surprise to see the business already rebounding given the depth of our connection and the incredible strength of our local leadership team. So today, I can say that we're seeing the other side of the crisis in China, and due to the resilience and creativity of our team in China, we now have a playbook that we can use elsewhere. In addition to Greater China, we've applied that playbook in Japan and South Korea over the past two months, and we're seeing early momentum in those markets as well. And with COVID-19 now spreading across Europe and the U.S., we are applying the same playbook. We have prioritized the health and safety of our teammates, and we have closed our stores. Over the weekend, we drove a strong digital marketing campaign to engage consumers across Europe and across the U.S. to stay healthy and connected while they're at home. And our digital commerce remains open and in growth mode, supported by our teammates in our distribution centers. We also know that this is a moment in society where the private sector has a major role to play. Companies like Nike need to do our part. So our teams in innovation and manufacturing are exploring designs for personal protective equipment, or PPE, to support doctors, nurses, and others on the front line of this outbreak. Based on needs identified by the teams and health professionals at Oregon Health and Science University, our teammates are working right now about how to best help, including prototyping face shields with OHSU and others. It's been so energizing to see the quick strike efforts of the cross-functional team to try to help with this critical need. That said, we expect the next several weeks to be a challenging period for those living in the U.S. and Europe. And I can't precisely predict how long the containment phase of the outbreak will last. But our experience in China, Japan, and South Korea gives us confidence that we will see the other side of this crisis in the near future. And I can assure you this. As the situation continues to evolve, we will be ready and we will respond. We'll be guided by our values and we will execute with empathy and with decisiveness. For instance, we'll continue to maintain pay continuity even while our facilities are closed or have altered schedules. We know that our people are vital to fueling our deep connections with consumers, whether they work in our stores or in our distribution centers. And what's more, it's simply the right thing to do. So while this is an uncertain and challenging time, Nike has the foundation in place to emerge from it stronger than ever. Thanks to our competitive advantages, the power of our brand and connection with consumers, our digital capabilities, our compelling product innovation, And most importantly, our extraordinary team, we will manage our business back to full recovery. We know in times like these that strong brands get even stronger. And I truly believe that no one's better equipped than Nike to navigate the current climate. So with that said, let's go a bit deeper. I've spent the last 90 days digging into this extraordinary company. I thought I knew Nike after five years on the board, but believe me, when you get to dive even deeper, this place is even more impressive than I imagined. Let me walk you through what I've learned through the lens of the four strengths I just mentioned. Our strong brand, our digital advantage, our product innovation, and our extraordinary team. These are the strengths that will continue to set us apart. And these are the strengths that will allow us to shape the future marketplace going forward. Since I started as CEO in January, I have visited with our teams in several of our key cities, experiencing firsthand our deep connections with local consumers around the world, as well as our innovative retail concepts. I've also had the opportunity to meet with many of our most important strategic partners. During my first week as CEO in early January, I spent time in China and Japan before the virus took hold. I got to see firsthand just how deeply the Nike, Jordan, and Converse brands are connecting with consumers, both in compelling retail executions and in the many ways that Nike partners with regional and local governments to grow physical activity and sports. Our brand is driving these powerful connections to consumers worldwide. In fact, we were the number one favorite brand in all 12 of our key cities in Q3, and we continue to gain market share in key cities such as Berlin, Mexico City, and Tokyo. And during a time of physical store closures around the world, we know that our digital foundation will help us emerge out of the situation in an even stronger position. For instance, in Q3, digital delivered 36% currency-neutral growth, and it will continue to be a powerful driver of our deep consumer connections. As I mentioned earlier, we are executing our learnings from China about fueling sport and fitness all over the world. We're using our digital advantage to connect with and support our consumers as behaviors around staying healthy at home continue to evolve. Over the weekend, we made the NTC Premium free for everyone in the U.S. for 90 days. NTC Premium offers the best on-demand workouts and expert tips from our master trainers and others, as well as inspiration and support for healthy living. Digital remains our fastest-growing channel, with owned and partnered digital already representing more than 20% of our overall business. And our apps continue to be the sharp point of our growth, with the Nike app glowing revenue close to triple digits once again in Q3, fueling member acquisition and strong monthly engagement. And while we've driven impressive results in acquiring new members, engaging them, and fueling increased digital demand, we know that the opportunity here is still far greater than what we've realized to date and will become an even greater advantage for Nike as we move forward. And even while our stores remain closed in Europe and the US, we continue to work on defining the future of seamless physical and digital retail. To expand the advantage we have in digital, we continue to invest in our Nike Direct businesses, enhancing rich experiences like those in the Nike app at retail. And we're increasingly concentrating on our online to offline journey and accelerating our work to fully connect the marketplace while creating frictionless experiences for consumers throughout the world. Another clear competitive advantage is our product innovation. Our product and innovation have always set Nike apart from others, and I firmly believe this will become even more important of a differentiator as we look ahead. Over the past couple of months, I've spent a lot of time with our innovation design, product, and merchandising teams. I've done several deep dives in these areas, and I am truly blown away. As a board member, you get to see a lot, but you can never fully understand how impressive Nike's product innovation capability is until you spend time with our teams. For instance, today, we have more than 1,000 designers working at Nike with broad and deep talent across footwear and apparel. And you can just feel how their creativity and vision for product inspires everyone here and inspires consumers around the world. I got to see some of this innovative product on display at the Nike 2020 forum last month in New York, which served as a great illustration of the power of our two times innovation offense. There, we announced a powerful array of breakthrough product. such as our Next% footwear line, which offers measurable benefits to consumers. We also launched a new aesthetic for sustainability, where we're delivering new, scalable platforms like no one else. And by bringing together athletes and creative partners as only Nike can, the forum was an optimistic statement about the future of sport culture. And our advantage goes beyond our incredible product pipeline. It has become even more clear to me why Nike leads the industry. Our innovation, product, and design teams have an unrelenting commitment to discovering what's next. This culture of innovation is pervasive across our organization and deeply embedded within Nike teams around the world. From those who engage consumers at retail, to those creating the next wave of digital experiences that connect with consumers daily. Fueled by data and analytics capabilities, we are equipped with deep consumer insight that we combine with our design expertise and athlete research. This process directly translates into breakthrough product season after season, allowing us to drive more separation in the marketplace. There's one last thing I'd like to mention. As you know, the organized sports world remains on hold. And yet, the global culture of health and wellness continues unabated. In fact, in many ways, people are looking to health and wellness now more than ever. Whether it's to stay in shape at home or with a focus on mental health and stressful times, People all over the globe are finding ways to make sport a daily habit. Wherever, whenever, and however they can. And, as you may have seen, this past weekend, we encouraged consumers worldwide to work out at home with a simple message. Play inside, play for the world. We're seeing new behaviors normalize in countries all over the globe, and we're shifting our entire consumer ecosystem to deliver access to sport that speaks to consumers changing lives. Across key markets, we're working to create shared experiences and opportunity for virtual participation, connecting people to something bigger and showing how sport can inspire. And though there's no predicting when organized sports will restart, when our athletes, teams, and leagues can return to competition, I do have one guarantee. When the gates reopen, when the first whistle sounds, the energy is going to be off the charts. The world's passion for sports remains undiminished. And when it all returns, Nike will be right there with sports fans everywhere. In summary, I'm incredibly proud of our team and the results they delivered in Q3. And amidst unprecedented conditions across the globe, we are staying focused on not simply managing through this situation, but taking the actions that will allow us to emerge from it even stronger than before. We know it won't be easy, but Nike is better prepared than anyone else to regain that momentum, extend our brand leadership, and reshape the future marketplace. Nike has a long history of rising to the occasion in extraordinary times to deliver strong results and effect extraordinary change in the world of sport and beyond. And that's what we're going to do once again. With that, I'll now turn the call over to Andy.