Good afternoon, everyone. Welcome to NIKE Incorporated Fiscal 2024 Second Quarter Conference Call. For those who want to reference today's press release, you'll find it at investors.nike.com. Leading today's call is Paul Trussell, Vice President of Corporate Finance and Treasurer. Now, I would like to turn the call over to Paul Trussell.

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE Inc's Fiscal 2024 Second Quarter Results. Joining us on today's call will be NIKE, Inc. President and CEO, John Donahoe; and our CFO, Matt Friend. Before we begin, 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 NIKE's reports filed with the SEC. In addition, participants may discuss non-GAAP financial measures and non-public financial and statistical information. Please refer to NIKE's earnings press release or NIKE's website, investors.nike.com, for comparable GAAP measures and quantitative reconciliations. All growth comparisons on the call today are presented on a year-over-over basis and are currency neutral, unless otherwise noted. We will start with prepared remarks and then open up for 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 question to one. Thanks for your cooperation on this. I'll now turn the call over to NIKE, Inc. President and CEO, John Donahoe.

Thank you, Paul, and hello to everyone on today's call. NIKE is the market leader in sport. It's a role we take seriously. We create innovation that pushes human potential. We expand the world of sport inviting new generations all around the globe into the community of athletes. And we fuel the energy and excitement of sport itself, both on a global stage and on-the-ground in community and cities everywhere. One thing that distinguishes NIKE, more than any other brand in the world is that we get our inspiration from athletes and sport. And it was a great quarter for NIKE and the athletes who inspire us. Here's just a few examples. Kelvin Kiptum broke the marathon world record wearing the Alphafly 3, which built on our proprietary system of speed that continues to set the standard. A'ja Wilson earned WNBA Finals MVP after leading the Las Vegas Aces to their second straight title. LeBron James and Anthony Davis led the Lakers to the first ever NBA in-season tournament championship. Aitana Bonmati won the Women's Ballon d'Or and Sha'Carri Richardson was named USA Track and Field Female Athlete of the Year. Being inspired by world-class athletes like these, keeps us focused on what's - redefining what's possible. That's what sets us apart. No one changes the game like NIKE, from our breakthrough innovation for toddlers with the Swoosh 1 shoe to being able to elevate beloved products like Toby's into an entire franchise to NBA players increasingly choosing to play in the Sabrina 1, a shoe deeply resonating across gender. Again and again it's NIKE that pushes what's possible to break the status quo. Now in addition to creating best-in-class innovation, great companies must also focus on strong execution. And that's what we did in Q2, delivering our second $13…

Thanks, John, and hello to everyone on the call. NIKE's second quarter financial performance reflected our proactive marketplace management and disciplined execution with tremendous delivery by our teams in a dynamic environment. Revenue was up slightly versus the prior year growing 1% on a reported basis as we compare to 17% reported and 27% currency-neutral revenue growth one year ago. Gross margins expanded despite a highly promotional marketplace. And combined with disciplined SG&A management, earnings per share and free cash flow accelerated. As I said last quarter, we believe we are turning the corner and driving more profitable and sustainable growth. At the same time, there were a number of puts and takes in the quarter. So before I walk through our financial results, let me share some perspective on our performance in light of current macro and consumer trends as well as additional insight into our business direction. Now, as you recall, we moved proactively in the prior year to liquidate excess inventory and reduce wholesale sell-in for the first half of fiscal '24. And while this dampened our reported revenue growth through Q2, total retail sales in the quarter grew across the marketplace on top of double-digit growth in the prior year. ASPs were up across both footwear and apparel and AURs grew across channels. Average order values among NIKE members increased versus the prior year. Our higher-priced products, in particular, have been resilient with our $100 plus footwear models, driving strong growth in units sold across the marketplace. And overall, we have maintained lower markdown rates than many of our competitors. In the most impactful consumer shopping moments, NIKE's brand strength created even greater separation. We delivered market-leading results in Greater China and Double Eleven. And over the Black Friday and Cyber Week period, NIKE Direct grew…

Thank you. [Operator Instructions] Your first question comes from the line of Matthew Boss from JPMorgan. Please go ahead, your line is open.

Great. Thanks. So two part question. John, could you maybe elaborate on the structural changes that you cited that maybe in the pivot to the front foot on innovation? Just the structural changes that you see supporting that. And what that means for the product pipeline as we think to next year? And then Matt, maybe footing that portion of the press release relative to the commentary around the second half. Just how best to foot this? And could you help break down the change in your second quarter revenue -- your second half revenue outlook between retail and wholesale?

Sure.

You want to go first, Matt. All right.

Yeah, let me go ahead and start, Matt, talking a bit about the environment that we're operating in right now and what's changed and what we're seeing. We obviously delivered a strong quarter and delivered revenue in line with the guidance we gave 90 days ago and are incredibly pleased with the disciplined execution and management of the marketplace, including our inventory being down 14% and NIKE plus partner inventory being down double-digits versus the prior year. But what we saw in the quarter was a bifurcation of performance. And specifically what I mean is that we saw incredibly strong performance for the NIKE brand over the largest consumer moments if you book in from back-to-school in the prior quarter through Black Friday and Cyber Monday this quarter. But in the periods in between, we saw softer performance in the marketplace. And as a result of that, total retail sales in the quarter were below the expectations that we set for ourselves 90 days ago. As a result of that, and specifically considering the promotional activity we see in the marketplace and some of the softness in digital, we've lowered our guidance for the balance of this year and provided a little bit of sharpness for you on Q3 and Q4, in particular. Q3 really is reflective of the comparisons to the prior year, much like we anniversaried this quarter. But overall, we've taken a more prudent approach to our planning for the balance of the year given the increased macro headwinds we're seeing in China and EMEA, in particular, and the way that we've adjusted our digital growth downward based on the traffic softness that we've seen and the higher marketplace promotions. And so, you know, connected to what John will talk about in a second, our focus is on newness and innovation, particularly because in an environment like this where the consumer is cautious and we're seeing higher levels of promotional activity, it's newness and innovation which really creates brand distinction in this environment. And we're even seeing it in the context of recent releases and recent product introductions that we've had over the last 60 to 90 days.

And Matt, the first part of your question regarding the structural changes. You know, as you know, six months ago, we realigned our entire organization under Heidi O'Neill and Craig Williams as our co-Presidents. And it is making a huge difference in our focus and ability to execute. And as you know, we're single mindedly focused on aligning our entire team to drive what NIKE does best, innovative product combined with distinctive storytelling, combined with unique marketplace experiences. And as Matt just said, we have a real focus, Heidi, Craig and teams, a real focus on newness and driving our next product innovation cycle, which will elevate our entire portfolio, right. This is what NIKE does best. And we're doing it with consistency and scale where we want to break through. That's our focus. And so you're seeing some, you know, I'll maybe pick one example where you're seeing some early results. Look at what's happening in basketball right now, right? We are bringing fresh, innovative product at scale. So the past six months, we've launched Sabrina 1, LeBron 21, Tatum 1, Luka 2, the Ja 1. You saw Ja come back two nights ago, the Ja 1 on Christmas Day. And so that's creating huge momentum in basketball with great innovation. And in the next three months, we add to that GT Cut which is one of our most innovative shoes to date, the Book 1 which we think has great appeal on and off the court. And, of course, Kobe, which we think has huge potential on an ongoing basis. And so this is driving momentum both on the court through performance, like Nike does, innovation and performance and off the court. And that translates into lifestyle. You may have seen LeBron was wearing the Lunar Roam walking…

Your next question comes from the line of Michael Binetti from Evercore ISI. Please go ahead. Your line is open.

Hey guys, thanks for taking our questions here and thanks for all the detail today, particularly around some of the longer term thinking in the business. Some of the longer-term commentary is pretty helpful. I'm just wondering if we can help true up the margin story for the next few years. I guess, would you -- is the $2 billion in cost savings, we said the majority will be reinvested. If I try to think back to the longer-term target of getting the business to the high teens margins, this should go a long way. Do you -- is your feeling that the net amount of these efficiencies takes us to that multi-year target? And then considering, Matt, the commentary on the second half revenues here, a lot of it sounds like it's macro in China. You know, maybe kind of help thinking about as we look past '24, do you have visibility yet to say, hey, we've got the controllables to help us offset some of the macro pressures that we see to make '25 an algorithm revenue year?

Sure, Michael. Well, let me start on the margins. You know, I think that this quarter was really a strong proof point with strong gross margin expansion and operating margin expansion. And the team's execution in gross margin, in particular, was really strong. You know, when we look at the drivers of it, it's a combination of recovery of the transitory headwinds which we've been talking about for a couple of years now, but also structural drivers like price increases which we've been able to sustain in this environment and supply chain efficiencies, specifically meaning that we're improving our cost per unit as we deliver product into the marketplace. And so the underlying drivers that were behind our long-term margin goals are still there and this quarter is a great proof point as we're on that trajectory. The way to connect it to the safe to invest plan is to think a little bit about the opportunities for us to be -- to drive more profitable growth as we look forward. And I've been talking for a couple of quarters now about lowering our marginal cost of growth. And when I look back on some of the long-term targets that we've given like SG&A as a percentage of revenue being below pre-pandemic levels, we've largely done it. But when we look at our resources today, we see greater opportunity for efficiency and effectiveness and reinvesting some of those resources for higher return opportunities like John mentioned. And so that's really what we're focused on. I will remind you what I said on the call, which is that it's -- this isn't just SG&A. The $2 billion save to invest plan is up and down the P&L and its across our value chain. And so we will see benefits in SG&A,…

Your next question comes from the line of Gabriella Carbone from Deutsche Bank. Please go ahead. Your line is open. Gabriella, your [Technical Difficulty]

Hi. Thank you so much for taking my question. Sorry about that. I want to dig in a little bit more on the running category, particularly, you know, how is your approach to this category maybe changed over the past year? And then I know you mentioned trail running. Are there any other products with this category? You mentioned scaling moving ahead, but then you've been seeing good customer responses that you're excited about.

Yeah, Gabriella, we've made running a key priority. We talked about three areas we're really getting behind where we see huge growth opportunity that being Women's, Jordan and running. And as you said, in running, we tend to break it into three categories. You know -- and for us, it starts with road racing. That's the pinnacle, that's the peak. And as you know, in the past three to six months, we are dominating it through the Alphafly 3, which debuted in Chicago marathon. Kelvin Kiptum, as I mentioned in my remarks, set a world record. It's dominating the podiums for both men and women. And that'll actually be launching available to the public in Q3. And as we see people going into racing into the -- to the Olympics, both marathon and otherwise, our performance running for racing is unmatched. And then as trail, as you mentioned, that's the fastest growing segment, grew 20% for us. And we do what we do. It's innovations driving it. So, the Ultrafly trail, which is the first trail shoe with a carbon fiber plate, that's again very NIKE, very classic NIKE innovation, performance innovation, along with Peg Trail and Zegama, trail is growing fast partly because trail running is growing. But increasingly, trail shoes are becoming lifestyle shoes. They're being worn on the streets, particularly in EMEA and in Europe, but also around the world. So, we'll continue to invest in great product there as well as, as I said in my remarks, at our ground game. And then in the road running or every day running category, this is the area where we have the most work. And so we have good product. We had some nice wins in the quarter, the Structure 25 and the Vomero 17, which were our latest updates for everyday runners, they had positive response from consumers and specialty runners, but we're very focused on building out our ground game with everyday runners. And that means getting into the RSGs, back into the RSGs and being present where runners are, whether it's -- not just at the marathons where the elite runners are, but the everyday races in the key cities around the world and the running communities. And you'll see us, we are steadily investing in that and building our presence there. And as we look forward in terms of driving scale in everyday running, as I mentioned earlier, we're focused on Pegasus. That's our largest franchise, one of the largest franchises in running history period. And we're very excited about Peg 41 and updates across the Peg family which are coming in calendar '24. So, a lot of focus. And we'll report, you know, in road every day running. It's going to be quarter by quarter. Steady progress, steady progress, steady progress toward our goal.

I'd just add too that we're excited about the product portfolio we have below $100. And that product offering that's coming to market in the coming quarters will also enable us to get back on our front foot at an important price point in both -- across in -- multiple markets across the world.

Your next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead, your line is open.

Thank you. Good afternoon. I wanted to focus on the China margins for a minute and was just curious outside of the FX hit that you're facing, do you see an opportunity to drive margins in China back toward pre-COVID levels or has something changed that makes that market less profitable?

Well, Lorraine, let me first just step back and look at how we see China for a minute and then we'll talk about margin because if you don't have a great business, it's hard to have great margins. And, you know, the fact is we feel very good about our position in China and our ability to compete. And that has not changed from 90 days ago. In China, sport is back. The China consumer is back out on the street with a real focus on active and healthy lifestyles. You see the government encouraging sport and healthy lifestyles and Gen Z is the most active generation ever. So that's a tailwind for our industry. And so even in the face of macro uncertainty, our brand is continuing to resonate. And we're doing what NIKE does so well, which is taking global products, global innovations, global brand, global athletes and powerfully combining them and connecting them to local culture and local sport and local consumer moments. And a wonderful example last quarter is that Eliud Kipchoge, the world's best marathoner, did a tour through China right before the China -- the Shanghai marathon. As you know, we sponsored the Shanghai marathon. And sure enough, we dominated shoe counts in the top hundred. We swept the women's podium. And that's bringing energy and running and the lifestyle of running. And it's growing the market. I mean, I think we're in a great percent. We, yes, there's some macro headwinds, but we feel very good about our position and our ability to compete.

Yeah. And on the profitability side, what I'd say, Lorraine, is that this quarter, if we exclude the impact of FX, our EBIT grew faster than revenue in greater China. And so I think it's a great proof point that we can start to expand margins and move back towards where we were prior to the pandemic. I did mention that the marketplace is highly promotional and we're seeing that especially on digital. And so in the near term, the promotional nature of the marketplace is holding us back. But what I would tell you is that our inventory units are down versus the prior year. Our full price realization is continuing to improve in our stores and our partner stores. And, you know, as we look at the environment that we're in right now, we're not going to race to the bottom on digital. We're going to focus on prioritizing brand health and brand strength. And right now, the digital marketplace, in particular, is a -- is at the highest of promotional activity. And so an element of us revising our guidance for the balance of this year is an acknowledgement that we don't want to chase that. That's not who NIKE is. We're going to focus on innovation and newness and building a strong business in the marketplace on things like the basketball products that John referenced. We're super excited about bringing Kobe to market in greater China. The Jordan business continues to have tremendous resonance there and that's how we're going to grow and continue to compete in that market.

Your next question comes from the line of John Kernan from TD Cowen. Please go ahead, your line is open.

Excellent. Happy holidays and thanks for taking my question. Matt, how should we think about operating overhead and demand creation going forward as we think about the overall SG&A piece of the business? There's obviously some restructuring and some cost savings, but is this a time you need to reinvest given the changes in the competitive environment and the need to reinvigorate the product cycle and the marketing. Curious how we should think about the SG&A algorithm going forward.

Yeah, I mean, John, when we think about the safe to invest plan and the value it will create and the capacity it will create for us to be able to invest, invest at the biggest growth opportunities we see. We don't envision that as being people. We envision that as being consumer facing investment, bringing product innovation to market and having maximum impact with the consumer. And so our goal here is to see a reallocation of resources through this program, so that more of our dollars are going towards consumer facing activities that can have the kind of impact that you referenced. And we believe when we look at the size of the market and our position against some of the categories that John referenced and/or the way the consumer is continuing to encourage us to bring them new and interesting things from a Jordan perspective, we see opportunity to continue to grow our business and that's where our focus is. So I think we're going to -- we're focused on driving more profitable growth. That should mean that there's some leverage in SG&A, but you should also expect to see us reinvesting some of the resources that we're taking out of the business back in things that are consumer facing that have an impact on sport and that continue to enable us to maximize the impact of the stories that we want to tell.

That's exactly why we're doing it, because we want to double down on our investments to capitalize on growth.

Your next question comes from the line of Ike Boruchow from Wells Fargo. Please go ahead, your line is open.

Hey, good afternoon. Thanks for taking the question. Matt, maybe for you just on the North American market, can you just comment more broadly or specifically on the current state of the inventory situation, maybe both yours and just competitively of what you're seeing out there in holiday? And then just timeline on when you think that the inventory dynamics and at least North America might be more cleaned up or more healthy for the brand to start to, you know, see better price realization and growth? Thanks.

Sure. Well, so in the quarter, we did see growth in retail sales in North America versus the prior year. Remember, it wasn't a lot of growth because we were comping some very significant growth rates in the prior year. The actions that we've taken on inventory are significant. And our inventory units are down strong double-digits in North America. That's the biggest market where we've seen the biggest movement in our inventory. When we look at the level of inventory in our partners relative to their current level of retail sales, we feel good about the weeks of supply that we have there. And what I would tell you in the large majority of our partners, we also are seeing the highest mix of current season inventory that we've seen in many, many seasons. And so we feel great that our partners are positioned to put our newest and our -- and most relevant product in front of the consumer. We are watching the marketplace closely because my comments around the big consumer moments and the in between periods applied to North America as well. And so we are watching cautious consumer behavior there. But at this point, we feel great about our inventory. And that's why we're so focused on newness and innovation, because that's what's going to pull us through a promotional marketplace like we have. And so there's definitely a lot of inventory in the market across brands, but we feel great about where we are. And newness and innovation is what will enable us to earn open to buy in our partners and will enable us to re-accelerate the top line.

Our last question comes from the line of Paul Lejuez from Citi. Please go ahead, your line is open.

Hey, thanks guys. I'm curious if you could talk about and quantify the cumulative freight drag that you've seen over the past two years and the timing of how you will recapture that freight drag in F'24 versus F'25 just based on your recent freight contracts? And what are the offsets as we think about potential puts and takes on the gross margin line '24, '25? Thanks.

Well, sure. We've been talking about 200 basis points of impact from ocean freight cumulatively over the past two years. And we started to see those transitory benefits begin to recapture here in the second quarter. Some of our upside in the quarter versus our guidance was it came a little bit earlier than we had anticipated. Our rates for this year locked. And so we expect to continue to see up -- to see that the recovery of that in Q3 and Q4. One of the other transitory impacts that we're watching closely was markdowns. And right now, we're only planning for a very modest amount of markdown recovery relative to the markdowns that we incurred in the prior year. And that's just given where the marketplace is. We've decided to take a more prudent approach to our margin guidance for the balance of the year given some of the uncertainties that are out there. So, you know, when we look to the balance of this year, we're encouraged by the second half expansion being higher than the first half expansion. And one of the other things that we're starting to get visibility into when we look at our margins in the fourth quarter is product costs -- product input costs are starting to flip to a tailwind. And so when we think about the long-term margin goals that we have, the teams are executing well and we continue to be encouraged with what we're seeing through this year.

Thank you, everyone. This concludes today's conference call. Thank you for your participation and you may now disconnect.