NIKE, Inc. (NKE) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, everyone. Welcome to NIKE Inc.'s Fiscal 2019 Second Quarter Conference Call. For those who want to reference today's press release, you will find it at https://investors.nike.com. Leading today's call is Nitesh Sharan, Vice President, Investor Relations and Treasurer. Before I turn the call over to Mr. Sharan, let me remind you that participants on this call will make forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in the reports filed with the SEC, including 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 nonpublic 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 website, https://investors.nike.com. Now I'd like to turn the call over to Nitesh Sharan, Vice President, Investor Relations and Treasurer.

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE Inc.'s fiscal 2019 second 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.nike.com. 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. [Operator Instructions] Thanks for your cooperation on this. I'll now turn the call over to NIKE Inc. Chairman, President and CEO, Mark Parker.

Thanks, Nitesh. Hello and happy holidays, everyone. We've seen some amazing highlights in sports this past year. Eliud Kipchoge smashed the Marathon World Record. Simone Byles dominated the world championships. Kylian Mbappé became a global star at the World Cup and LeBron James continued to inspire on and off the court. It was a year of incredible achievements for NIKE as well and Q2 was another strong proof point on our journey. We continue to show progress against our key long-term objectives of driving innovation, direct connections and speed and agility around the world. Our teams are doing a fantastic job of delivering sustainable, profitable growth through the Consumer Direct Offense, while aggressively pursuing our highest potential long-term opportunities. We set high goals and each success makes us hungry for more. The marketplace in which we compete is highly dynamic. Consumer expectations are accelerating and the macro-economy is increasingly volatile. A key part of our strategy to win in this environment is to double down on digital. Our digital transformation is taking hold through a series of positive disruptions across the business. For example, we're leading the industry through a retail revolution. We're creating sports first, smart adaptive footwear. And we're investing in a global supply chain that delivers personnel at scale. It's all incredibly energizing and we find that the more disruptive we are, the more we grow. Our digital disruption is fueled by breaking old models, building new commerce partnerships, emerging new talent with our years of industry experience. Our teams are driving change and it's yielding excellent results. For the quarter, NIKE Inc. revenues grew 10%. On a currency-neutral basis, NIKE Inc. revenue increased 14%. Gross margin was up 80 basis points to prior year and earnings per share was up 13% to prior year. Specific highlights include 9% growth in North America and nearly 20% constant currency growth in our international geographies. Digital growth of 41% on a constant currency basis and continued momentum in both sportswear and performance categories, including a return to growth in the Jordan business. The momentum we're driving is grounded in strong product innovation. We're increasing the pace of new concepts and bringing a new discipline to how we manage the life cycle of our innovation. We have a clear road map of how we stage our new platforms, giving each one the space to shine through high-energy storytelling and then ramping up scale and choice to serve diverse consumer needs. Put simply, we're increasing the return on investment in innovation. One of our great differentiators is, of course, NIKE Air. It's being energized through platforms like VaporMax and Air Max 270, two of the world's top-selling athletic footwear models. New interpretations of our icons, led by the Air Max 95 and 97. And this spring, we're excited to add a new distinct Air platform to the mix with the Air Max 270. The consumer is already anticipating its arrival and will keep the interest high through multiple iterations early in its product life cycle. NIKE React too will enter a new phase as we expand the platform beyond running and basketball into lifestyle product, with the Element 55, and the shoe of the year, the Element 87. Both styles will scale significantly in 2019. Next year, we'll also add NIKE React hybrids to combine multiple cushioning platforms, along with a redesigned Epic React 2.0 coming in spring. As we broaden platforms across categories, we're also broadening them across price points to bring them to more people. As we mentioned on our call - last call, we see greater opportunities for moderately priced footwear from NIKE right now. So we're creating a more complete consumer offense for core footwear by creating performance and lifestyle icons and core-only innovations. At NIKE, it's our mission to make athletes better. But perhaps no innovation delivers on that promise by ZoomX and the Vaporfly 4%, which has dominated the world's marathons since 2017. We've started something special with the 4%, enabling a dramatic improvement for the world's best runners, and you can expect more exciting breakthroughs to come here. That reputation has made its way to every day athletes, making 4%, the most sought after shoe on race day, and it's created a halo effect for many of our NIKE's fast footwear styles, especially the Peg 35, driving double-digit growth in the running category in Q2. I'm excited to announce that in the New Year, we'll launch a new adaptive performance platform in Basketball at the $350 price point. We have a smart shoe designed for the perfect fit and it's a major step in advancing and connecting our digital transformation to product. This is just one better fit solution amongst many that we're working on. And we look forward to rolling them out throughout the year. We have a full innovation pipeline ahead, including new cushioning platforms, which will carry our strong product momentum into fiscal '20, all the way to Tokyo Olympics and beyond. I've spent a lot of time with the Olympics team and the Tokyo 2020 collection is the boldest we've ever assembled across performance and lifestyle in footwear and apparel. We're growing our competitive advantages in many ways. Sustainability is one example, where we're reducing waste at a scale that creates change for our entire industry. NIKE Flyleather made a 50% reclaimed leather, will scale to over 1 million pairs starting this summer. NIKE Flyknit represents a multi-billion dollar business and uses 60% less waste than traditional manufacturing. And NIKE Air uses 50% recycled manufacturing waste in hundreds of millions of pairs. As a whole, we're making great progress to lower our environmental impact as a company, driving greater efficiencies and fueling growth in our business. Another area where our 2X Innovation agenda is making a dramatic impact is in apparel. As designers, there is no greater challenge than innovating for the body in motion. We think about many things, such as how to account for different environments through moisture management, creating breathability that adapts as needed or keeping our gourmet comfortable, the climate comfortable when it's twisting and turning. Through new materials and methods of make, our apparel teams are continuing to push the limits in performance silhouettes, and in the process, creating new style. Our strategy starts with taking sports into new places. For example, in basketball, our partnership with the NBA is fueling strong growth. Our NBA apparel accelerated in year two, especially with our city editions jerseys, led by Miami, Minnesota and Brooklyn. And to no one 's surprise, LeBron has moved to the Lake, who has also created opportunity. We already booked 3x more NIKE lakers gear this year. And our work with the NBA has also created a lift for NIKE in line basketball apparel. We built on the success of our showtime hoodie and added Therma Flex pants, which has seen great sell-through. Overall, the traction we've gained for basketball in NIKE Direct and internationally led to strong global growth for the Basketball category this quarter. In sportswear, our biggest category apparel grew over 20% this quarter. Sportswear fleece and women's apparel were up double digits. In sportswear, we are anchoring our communications around head-to-toe collections, which makes it easier for consumers to shop to complete look and strengthens our presentation and storytelling. Apparel continues to be one of NIKE's greatest growth opportunities, and in the back half of the fiscal year, there's a lot to be excited about. We're launching new high-performance kits for the Woman's World Cup in France. Yoga collection, that includes men's yoga apparel for the first time at NIKE. New types innovation and expanded NIKE Tech Pack collection. Two other areas of our business where we're accelerating, but we know we have much more opportunity ahead is Women's and Jordan. There's incredible momentum for women in sport right now as athletes elite and every day lead a movement of health and wellness, while driving a strong appetite for athletic footwear and apparel. This energy is manifesting in a number of ways. For example, footwear for women overall was up 20% for the quarter, and sneakers for her are really taking off with the Sage Air Force 1 emerging as for favorite franchise, owning the number one spot on nike.com for 5 weeks running. Our edit to amplify strategy to offer more color and material choices and fewer styles is also proving successful. NIKE has the top three selling women's athletic footwear models above $125 with the Air Max 270, VaporMax and Epic React. And in apparel, our broad business remains a strong growth opportunity, up over 20% in Q2. Looking ahead to this summer's World Cup, NIKE will dominate on the pitch. A total of 14 of the 24 national teams will compete in NIKE, including the favorite U.S. national team. And throughout the year, we'll continue to - our Just Do It campaign that celebrates elite and everyday female athletes around the world. We think 2019 is going to be a true tipping point for woman in sport with more participation, more coverage and overall more energy. Meanwhile, with the Jordan Brand, we're seeing positive results from the strategic shifts that we are making. In Q2, Jordan grew double digits and we returned to healthy, sustainable growth in North America. At the same time, we continued our pace of double-digit growth internationally. We're making great progress in diversifying Jordan. Apparel had a very strong quarter, especially internationally. Sell-through of the Jordan and PSG collaboration exceeded expectations and we'll come back with a refreshed collection in January. Jordan's performance footwear is also contributing to solid growth, led by the new Air Jordan XXXIII [ph] game shoe and the Max Aura that's doing well in China at $120 price point. And from a Sportswear perspective, we're elevating our storytelling with icons like the Air Jordan 1, which is more coveted than ever. At the start of Q3, our team executed an incredible effort with the most successful NIKE sneaker ever launched, with the Air Jordan XI Concord. It was a well-orchestrated plan, complete with geo targeting that offered preheat paris [ph] to our members, total integration across our business with partners like House of Hoops and Footaction and locally driven storytelling in our key cities. The Concord shows that the Jordan Brand yet again has the power to drive launches with incredible volume and create energy for the brand. We're bringing much greater balance to Jordan with much more opportunity ahead. In 2X Direct, we're beginning to realize a multiplying effect as we scale our most innovative experiences. This quarter, you could feel the momentum swing in the conversation around retail. We saw at over the Thanksgiving shopping week, fueling more than 30% increase in our digital business in North America for the quarter. In China, Singles Day once again broke records. NIKE earned a number one sport brand on Tmall with our overall business for the day, up over 40% from last year's Singles Day. It's clear that the consumers craving experiences and the fastest way to meet that demand is to test, learn and scale new features. We know not every one of our new experiences will be successful and not all will be scalable. But when we do find features that improve our services, NIKE's advantage is how quickly we deploy them across our global footprint. In November, we opened our House of Innovation concept in both Shanghai and New York. The energy and performance at both locations has exceeded expectations. Both stores create the most personal and responsive retail environment in the industry. It's a digital experience brought to life in a physical space. And uses our most exciting features to date, such as the ability to scan barcodes to check availability and by the full look of mannequins, instant check out that requires no waiting at the register, expert studio that gives personal guidance, and special unlocks and notifications when members enter the store. The gateway for consumers to get the most value out of these new experiences is membership. We want more doors to feel like a personal home for members, where we can elevate one-to-one service. And we want to leverage mobile apps to make sure NIKE is serving our consumers wherever they are One way we do that with members is to create ways to be in their path more organically. For example, the LeBron Watch, which will deliver 25% of the LeBron 16s in the marketplace this year makes these on court shoes available in the moment through sneakers and our partner mobile apps. In China, this month, we gave early access to the Kyrie 5 through a QR code and a live streamed NBA game on WeChat. And users can now buy directly on our NIKE Run Club and NIKE Training Club apps, personalized to the way they train. Another key to making NIKE commerce a part of people's lives more seamlessly again and again is to develop unique experiences with some of the world's most engaging and brand-friendly platforms. And this quarter, we did that with a new feature in Instagram, that allows NIKE product to be shopped directly from stores. On the Apple Watch, where we continue to serve our most active and highly-valued NIKE Run Club members. And with Google, where consumers can now buy directly from NIKE through search and Google Assistant. And to further leverage partnerships that amplify our brand, we're making great strides with strategic partners like JD Sports, Foot Locker, Nordstrom and Dick's Sporting Goods, where elevated experiences are driving outsized growth in the wholesale channel. We know that to fully leverage or fully offer consumers what they want in the moment requires a high level of agility in our business. And through 2X Speed, we're elevating the industry, creating an end-to-end value chain that's centered on the consumer. The pillars are demand sensing and insights, so we know our consumer, responsive product creation and manufacturing to provide the best product, delivery at speed for product to arrive when they wanted and connected inventory so they're never disappointed and starts with better demand sensing and insights. In Q2, our Express Lane business grew double digits, supporting key cities with hyperlocal product and faster fulfillment to drive higher full price sell-through. Responsive product creation and manufacturing has many components. Digital product creation allows for greater precision and creativity and design, planning and staging materials drastically reduces lead times and automation increases speed and quality in manufacturing. Today, more than half of our total footwear production has been modernized through initiatives started in the modernization centers of our top six manufacturing partners and our Advanced Product Creation Center at our world headquarters. We're also investing in delivery at speed. Take Singles Day as an example. To deliver against this massive opportunity, we had coordinated fulfillment strategy across our 12 Greater China distribution centers, and we shipped direct from over 50 retail doors to consumers on the day. Overall, we fulfilled over 5 million units in 5 days. And finally, our connected inventory strategy with partners like Zalando and JD will help us realize many of our Speed initiatives. In support of that initiative, we'll introduce RFID into footwear and all not licensed apparel in 2019. This will lead to vastly improve product visibility and accuracy across the supply chain from product creation to point-of-sale. And it further opens up the possibility to integrate more widely with our wholesale partners, contract factories and distribution centers. Each of these work streams is a building block for NIKE to become more personal at scale. And as a system, they demand enterprise-wide coordination and innovation. NIKE's ambitious digital transformation is driving the strong results you see today. We're staying competitive and opportunistic with every shift in the marketplace. As a leader, NIKE has high expectations. And as good as this quarter was, we know we have the ability to do much more. We're going to continue to use our scale, speed and agility to grow sport and our business around the world. Thanks. And now here's Andy

Thank you, Mark, and happy holidays, everyone. Our Q2 financial performance was exceptionally strong across nearly all dimensions. 14% currency neutral revenue growth, 80 basis points of gross margin expansion, 13% EPS growth versus prior year. Our strong growth was also broad-based across all four of our geographies, as well as across footwear, apparel, men's, women's and most categories. This broad-based momentum is not happening by accident, but rather is being fueled by our focus on what matters most to consumers globally. The common theme across our portfolio is the Consumer Direct Offense. More specifically, we are bringing the triple-double of 2X Innovation, 2X Direct and 2X Speed to life in our 12 key cities and 10 key countries around the world. Take innovation, for example. We've said we expect new innovation platforms to drive over 50% of our incremental growth over the next 5 years. In fact, year-to-date, new innovation platforms, including VaporMax, Air Max 270, React and ZoomX have driven over 80% of our incremental growth. Another significant contributor to our growth from a product perspective are our Power Franchises. By leveraging an approach that Mark calls editing to amplify, we're bringing new dimension and driving the growth of iconic franchises like the Air Force 1 and the Air Jordan 1. We do that, for example, through fresh new designs and collaborations for both men and women, as well as color and material updates through our Express Lane. Our broad-based growth is also being fueled by new experiences that more directly connect NIKE to our consumers globally. We expect NIKE Direct and partnered NIKE experiences physical and digital will contribute over 50% of our incremental growth and outpace undifferentiated retail over the next 5 years, leading the way once again in Q2 with NIKE Digital. Our NIKE Digital ecosystem continues to grow faster than all other channels, growing 41% on a currency neutral basis. And as we drive deeper, more organic, one-to-one engagement with consumers, mobile now represents well over 50% of our digital commerce revenue. Our 2X Speed initiative is also driving our momentum. Cutting our time to market in half is not an all or nothing proposition, we're already infusing greater speed and agility into our product creation and supply chain processes, allowing us to amplify what's working with the consumer closer to real time. For example, product updated and fulfilled through our Express Lane is growing double digits and now represents a double-digit percentage of our total business. This is significant as Express Lane product also largely sells through at full price, favorably impacting margins. 2X Speed also includes initiatives ranging from leveraging automation to a more focused materials power and material staging. These initiatives also reduce product cost and enhance inventory efficiency, the greater labor productivity and less waste. In short, we are very pleased with our strategic execution and the strong performance we have delivered to date. That said, more importantly, we are confident in the sustainability of our growth going forward. While FX headwinds have intensified, we now expect stronger currency neutral revenue growth in fiscal year '19 than previously planned. And as we're beginning to gain greater insight into fiscal year '20, we're seeing continued strong demand. Our positive outlook is not merely optimism, but rather is founded on fundamental changes in how we operate at NIKE. One fundamental change is how we bring innovation to market. In addition to driving faster innovation cycles, we're also focused on innovation platforms that have greater potential to scale across geographies. Accordingly, as Mark detailed, we've an extraordinary pipeline of innovation to come over the balance of fiscal year '19 and throughout fiscal year '20. That begins in spring with the launch of the Air Max 720 and HyperAdapt in Basketball, and extends the innovation platforms launching in early fiscal year '20 and through and beyond the Tokyo Olympics. We're also digitally transforming NIKE and driving positive disruption in our industry, unlocking new opportunities for growth long-term. While we already have extraordinary digital momentum, we're still in the early stages of this transformation. We are executing against a 3 year road map of new digital capabilities that will enable us to continually serve consumers better. We're aggressively building those capabilities in-house and accelerating our development of those capabilities through acquisition. Our 3 year road map also includes the global expansion of our digital ecosystem in the key cities and countries, where we see the greatest opportunity for growth. For example, just last month, we launched the NIKE App in Japan, where it immediately became the number one rated shopping app. Over the next 5 years, we see the Consumer Direct Offense delivering on the financial model and measures of success we communicated at our Investor Day back in October 2017. But we are already setting our sights even higher longer term. We see the opportunity to expand the definition of sport, to be even more inclusive, including competition and training as well as movement and play. By using this broader lens to inspire and enable more active lifestyle, we will grow the market for athletic footwear and apparel. There are four areas where this purpose-driven approach to growth is creating outsized opportunities for us, international, digital, apparel and women's. The overall footwear and apparel industries in our international markets are already significantly larger in aggregate than in the U.S. That said, in international markets, the athletic segment of the overall footwear and apparel market has historically been less penetrated than in the U.S., but that is changing fast. Sport participation and culture continue to accelerate in international markets. And when sport grows, NIKE grows. China is perhaps the best current example of this phenomenon. And second, we said at our Investor Day, that digital owned and partnered, would comprise 30% of our business by 2023 as compared to roughly 15% of our business today. Frankly, we're already thinking bigger as we look longer term. Our industry has lagged many other industries in terms of digital penetration. Many consumer products industries are already at 50% digital penetration and projected to be well over 80% digital by 2030. We all know that disruptive new consumer-centric digital experiences have catalyzed the shift to digital in those industries. So as we increasingly innovate and lead with digital, we are intentionally disrupting our industry. We see this as positive disruption that widens the aperture for growth long term. We now see 30% digital penetration as just a milepost on our path to the majority of our business being digital. Third, apparel is another extraordinary opportunity for growth at NIKE. Apparel is a larger market in footwear globally. And at the same time, athletic apparel accounts for a smaller percentage of overall apparel than athletic accounts for within overall footwear. That dynamic is also changing fast. Consumers are increasingly choosing performance and sportswear apparel for more occasions as it better serves their more active and expressive lifestyle. And finally, as we aim to redefine and expand the definition of sport, that is with a sharp focus on women. Similar to the strong returns we are seeing from having doubled our investment in innovation, we see the potential for asymmetrical returns by editing and more aggressively shifting resources towards our women's business. The women's footwear and apparel markets are larger than men's. Yet today, women's represents less than quarter of NIKE's total revenue. And we're already on this journey, as our women's business grew double digits in Q2, but we see step change growth opportunities ahead by serving women more deeply within classifications and across more occasions for her. In short, we have strong current momentum and we have extraordinary growth potential long term. But before I share more specifics regarding our outlook, let's reflect on the drivers of our current momentum. NIKE Inc. Q2 revenue increased 10%, up 14% on a currency neutral basis. This exceptional growth reflects double-digit currency neutral momentum internationally and strong high single-digit growth in North America. NIKE Digital was the fastest growing channel in each geography with 41% growth in aggregate on a currency neutral basis, again, led by mobile. That said, FX headwinds had a slightly larger impact on our reported revenue growth than the roughly three points we anticipated 90 days ago. We also delivered strong gross margin expansion of 80 basis points across NIKE Inc., fueled by NIKE Direct's growth and a higher mix of full price sales. Demand creation grew 4% in the quarter with our focus being on increasingly connecting with consumers through digital experiences and platforms. Operating overhead increased 18%, reflecting strategic investments that are accelerating NIKE's digital transformation and will fuel long-term growth. Our effective tax rate for the quarter was 15%. Second quarter diluted earnings per share were $0.52, up 13% versus prior year. And as of November 30, inventories were up just 1%, reflecting a healthy pull market for NIKE and a lower mix of closeout across all geographies. Now let's turn to the financial performance for our reported operating segments. In North America, Q2 revenue grew 9% on a reported and currency neutral basis. NIKE Direct grew high single digits with NIKE Digital up well over 30% in North America. As Mark mentioned, we are now turning our vision for the next generation of retail into a reality. In our NIKE Live concept on Melrose, we're aligning data-driven, bi-weekly flow of the product to the store with digital storytelling and one-to-one connections between the store team and local consumers. As a result, the store is driving strong digital member acquisition, engagement and buying. And we're seeing even more impressive early results at our new House of Innovation in New York. While the overall retail marketplace in North America is still going through consolidation, and we do expect that to continue, our NIKE wholesale business in aggregate has returned to strong growth with improving profitability, led by our strategic retail partners, such as Foot Locker and increasingly JD. In Q2, we also reignited brand heat in North America through the Just Do It campaign that was launched in early September and by amplifying key moments in sport like the launch of the NBA season. We see our brand tee across both NIKE and Jordan, our strong pipeline of innovative product and digitally like consumer experiences continuing to fuel strong growth in North America. In EMEA, Q2 revenue grew 14% on a currency-neutral basis, driven by strong growth across sportswear, running, training and Jordan. NIKE Digital led all dimensions of the marketplace growing over 30% versus prior year. We have extraordinary momentum in this geography as we're taking significant share and we're growing the market. We are mindful of the geopolitical dynamics in Europe. That said, we have a long track record of delivering growth and profitability amidst a wide range of macroeconomic circumstances. As we look ahead, we expect our momentum to continue in Europe. In all five of our key cities in EMEA, consumers rate us as the number one cool and number one favorite brand, and in fact, those ratings strengthened even further in Q2. We're connecting more directly and deeply with consumers locally through our key city focus and we're seeing the impact globally. For example, through the PSG-Jordan partnership, we connected authentically with consumers in Paris, while the product sold out at launch around the world. We also recently introduced the NIKE App at Retail and NIKE Town London, as well as the sneaker's past experience in Paris, allowing consumers to reserve shoes from high heat launches and pick up in store. Those services are removing friction and personalizing the shopping experience, driving significant new member acquisition in two of our key global cities. Next, let's turn to Greater China, where yet, again we delivered double-digit revenue growth in Q2. This marks the 18th consecutive quarter of double-digit revenue growth in China. In Q2, growth accelerated to 31% on a currency-neutral basis with digital growing over 40%. As evidence of the scale and digital nature of this important market, as well as the strength of the NIKE Brand, our sneakers app community in China, and recall that the sneakers app was launched just last year, it's already the same size as our sneakers community in North America. In Q2, with the opening of House of Innovation in Shanghai, we also began to more fully leverage digital in this largely NIKE-branded physical retail environment. It's still early days, but the results have been extraordinary. While there has been uncertainty of late regarding U.S., China relations, we have not seen any impact on our business. NIKE continues to win with the consumer in China. For over three decades, NIKE has been a brand of China, for China. We've connected deeply with the consumer here through our key city focus on Shanghai and Beijing. Through partnerships with sports federations, teams and athletes and by partnering with China's Ministry of Sport to fuel greater sport participation in schools across the country. In fact, just last month, leading up to the Shanghai Marathon, we took Eliud Kipchoge on a tour of Shanghai and other key cities. And then on Marathon Day, we launched a Shanghai-focused Just Do It campaign. In just the first 24 hours, the campaign was watched more than 16 million times. We are bullish about our potential to continue delivering strong, sustainable and very profitable growth in this important geography. In APLA, Q2 revenue grew 15% on a currency-neutral basis with balanced double-digit growth across footwear and apparel, as well as double-digit growth in sportswear Jordan and NIKE basketball. NIKE Digital is also accelerating in APLA with revenue growing over 75%. We also continue to expand our digital connectivity to consumers across this region through commerce partnerships, such as ZOZOTOWN, Flipkart and others. APLA is a market in which we are extremely entrepreneurial, testing new concepts that leverage digital to enhance the consumer experience at retail. As we mentioned on our last call, we'll be opening a NIKE Live experience in Tokyo in Q3. And in Seoul, we are testing our connected inventory strategy. We have connected the inventory across 19 NIKE branded doors, including doors owned by two of our strategic partners. This connected inventory pilot has yielded very promising early results, serving thousands of consumers whose demand would otherwise have been unmet due to product being out of stock in a particular store. And finally at Converse, revenue increased 6% on a currency neutral basis in Q2. Growth was driven by strong double-digit growth in Asia and a sharp acceleration in own digital growth globally, approaching triple digits. While Converse wholesale in the U.S. and U.K. remain challenged in Q2, Digital also accelerated in those markets. We see significant opportunity to grow Converse by expanding the product portfolio, including within Basketball as well as launching a new digital platform. And with that, let's turn to our outlook. There is increasing volatility and uncertainty of late on a macro level. That said, what is certain is that NIKE's execution of the consumer direct offense is driving consistently strong and sustainable broad-based growth across our diverse global portfolio. That is because we are focused on what matters most to consumers and they are responding globally with strong demand for NIKE. Accordingly, our full year guidance for fiscal year '19 reflects stronger currency-neutral revenue growth, stronger gross margin expansion and accelerated strategic investment. For the full year, we now expect currency neutral revenue growth to be in the high single-digit range, potentially approaching low double digits. Based on current foreign exchange rates, we expect reported full year revenue growth to be over 3 points lower than our currency neutral revenue growth. In other words, at the low end of the high single-digit range. For gross margin, our outlook has also improved. We expect our full year gross margin expansion to be roughly in line with the gross margin expansion of 70 basis points that we delivered over the first half of fiscal year '19. We expect SG&A for the full year to grow in the high single digits as we continue to invest in new digital capabilities that will differentiate NIKE and fuel our long-term growth. We project other expense, net of interest expense, to be between $50 million and $75 million for the full year. And we continue to expect our effective tax rate to be in the mid-teens for fiscal year '19. That said, the finalization of regulations-related U.S. tax reform may result in discrete adjustments that impact our tax rate. While our focus is on sustaining profitable growth over the course of fiscal year '19 and for the long term, I will provide a bit of context on Q3 considering the current macro environment. In Q3, we expect strong currency neutral revenue growth squarely within the high single-digit range. Based on FX dynamics, our reported real dollar revenue growth will likely be roughly 4 points lower than our currency neutral revenue growth in Q3. For gross margin, we expect Q3 expansion to be roughly in line with our full year guidance. As for SG&A, we expect growth in the low double-digit range in Q3 as we continue to prioritize strategic investment. And finally, we expect our effective tax rate in Q3 to be between 16% and 18%. Our execution of the Consumer Direct Offense is driving consistently strong performance. Yet, we are still in the early stages. As we continue to execute, we're not only building current momentum, we're also gaining greater insight into NIKE's potential to transform the industry, drive sustainable growth and create extraordinary value for shareholders long term. With that, we'll now open up the call for your questions.

[Operator Instructions] Your first question is from Lauren Cassel with Morgan Stanley. Your line is open.

Thanks so much and really nice quarter. I just want to ask about gross margin. So 70 basis points for the full year and in the third quarter. I think previously, you were expecting second half gross margin to be a little bit better than the first half. Is there anything that's changed or maybe just being a little more conservative given the macro backdrop? That's my first question. And then, maybe just talk to us a little bit about how much of the 9% growth in North America has been driven by ASP versus units? And perhaps given the robust innovation pipeline that you guys have, if there's an opportunity for that region to potentially grow a little bit faster than 3% to 4% over the long-term? Thank you.

All right. Thanks for the question, Lauren. As for gross margin, I'll touch on that question first. We are expecting our gross margin to be better in the second half of the year. And as you note in our reported results, it was slightly better than we expected in Q2. We're seeing structural benefits to our margin from our over-indexing growth in Direct, which has had very strong momentum and momentum that's exceeded our expectations, specifically in digital, as well as a greater mix of premium innovative product and stronger full price sell-through. We're also benefiting from a clean marketplace, particularly for NIKE. So as noted in my remarks, we do have an improved outlook for '19 with our expansion been roughly in line with the year-to-date margin expansion of 70 basis points. And as we noted when we entered the year, we expect that the second half margin to be stronger than the first half. And in the first quarter, our margin expansion was lesser than in the second quarter. I would note that in any given quarter, there can be anomalies that impact margin. And finally, I'd note that, Q2 is a quarter in which our margin is historically lower. Q3 and Q4, we have higher margin. And so the expansion we expect in the third and fourth quarters is actually strong expansion on an already relatively higher quarterly margin. And then you asked about ASP and units. What I would note is that ASPs were up across our portfolio in both footwear and apparel. Again, new innovation, strong full price sell-through, our shift to Direct, clean marketplace are impacting ASPs. We see continued ASP expansion in our order book going forward. And so very balanced. Again, single-digit rates of increase in footwear and in apparel, with apparel ASP is even expanding a little bit stronger than footwear, but both strong. And then, like I said, balanced with strong unit expansion in both footwear and apparel.

Great. Thanks very much…

Thank you, Lauren. Operator, we'll take the next question, please.

Your next question is from Kate McShane with Citigroup. Your line is open.

Hi. Thanks for taking my question. My question today was on Jordan. I know you don't talk or guide the magnitude of growth that you expect for a particular line or brand. But I wondered if you could talk generally the direction of what you expect for Jordan for the rest of fiscal year '19? And what are the key drivers that's going to be accelerating that growth?

Yes. As we said, the growth for Q2 was exceptional and we had a great start for Q3, with the largest product launch that we've ever had in our history. So that's a good signal right there. I think that the great story in Jordan is that we're managing the business more holistically between performance, product and retro. It's a clean market, a healthy market, particularly in North America. So we're in a good pull market situation now. We got great brand heat, I think, and that's really driven by strong product and storytelling. I mentioned the Concord of late. The PSG collaboration was a great source of energy that was kind of unexpected. But incredible sell-through in energy, not just in Europe, but around the world. So I think the potential in Jordan is the return to growth in North America and on the energy and the enthusiasm for the brand and the product around the world, and including and maybe I'll especially call out China there. And then, we have more potential as we diversify the portfolio of product, particularly around the Woman's offense in both footwear and in apparel. So again we're actually quite bullish on the future opportunities and continued growth for Jordan in the second half and beyond as we move into fiscal '20.

And just to emphasize the point that Mark made, Kate, Jordan's growth was strong in the quarter and it was based on growth across all geographies. We had strong growth in North America as well as Mark said, very strong double-digit growth internationally.

Okay, great. Thank you. And if I could just – all right, thank you.

Your next question comes from…

Operator, we'll take the next question, please.

Certainly. Your next question is from Bob Drbul with Guggenheim Securities. Your line is open.

Hi, good evening. I guess, just if we could stay on North America for a minute. I think you highlighted, I think, athletic specialty a little bit. Is the growth in the other channels having an outsized impact on this - the high single digit in this very strong outlook, can you talk maybe to some of the change to yourselves, and how you're doing in that area, please?

Yeah, I think the growth is - I mean, we feel really great about the growth in Digital as we've stressed continuously in our prepared remarks, but we also mentioned the increase on the wholesale side beyond expectations there. And I think that's driven by the elevation of the experience, the doors with, particularly with Foot Locker and Dick's for example. We're seeing - where we have invested in elevating and differentiating the retail experience for the consumer that we're seeing tremendous response. Obviously, the backbone of that demand and that response is great product. So we feel really good about that in terms of where we began this first half and then obviously with what's coming. But our - the strategic relationships with our bigger partners, who are really investing in the consumer experience is what we're seeing paying off. And we're bullish on that as we move forward. But, again, the big driver here is the combination of wholesale, including - in addition to our direct Digital.

Got it. And I'm just curious if, in the Jordan business, there's some momentum there, has - did the Michael Jordan and Malik Monk little exchange, did that help the business at all coming out of the quarter? Or has it had no impact?

Well, any news is good news in a way. There is - a little bit of energy is always good. So we will take it.

We'll take the next question, please.

Your next question is from Paul Trussell with Deutsche Bank. Your line is open.

Congrats on the great results. Could you just give a little bit more detail on your confident outlook outside of North America? Certainly, we see it in the results, but certainly, there have also been other companies that are maybe flat incremental discounting or concerns around a slowdown in sneaker sales, both in Europe and in China. So if you can just speak in more detail to your success there? And then second, if you can just go back and maybe talk a bit more about the opportunity for more moderately price point products. I think you mentioned early in your comments. Just elaborate on where you see that opportunity from a geography or channel or stall opportunity? Thanks.

Yeah. Sure. I'll touch on the first part of your question related to the momentum in China and Europe in contrast of what you referred to is what some others maybe saying in those markets. We're seeing extraordinary momentum in both markets. I'd say the headline in China is our growth continues to accelerate. We are the number one brand with consumers in China. We are brand of China, deeply connected with teams, federations, athletes. And, again, even the government to some extent, the Ministry of Sports in terms of our joint venture to fuel sport participation. We're seeing incredibly strong demand for our product, the innovation that we're launching, our Basketball product, our Jordan product. And then, as we've noted, our Digital business, both our NIKE Digital ecosystem and through our partnership with Tmall is fueling extremely strong growth. We have not seen any impact from our business from some of the U.S., China dynamics that we're all reading about. We're mindful of those. But in the context of being mindful of those, we continue to see very strong signs of momentum in China. As per Europe, very similar. Europe, we have great momentum. In both geographies, ASPs are strong, comp store sales are strong, closeout mix is low, inventory is healthy. In EMEA, in particular, we're taking significant share. That's also amplifying our growth.

Yes, the core footwear, let me touch on that briefly. We see basically our approach to complete offense. One of the things we look at is where are the opportunities on the offense to actually grow the business even further than what we see today. And core footwear, more excessively priced product in that core footwear zone, particularly in North America, but really around the world is a big opportunity for us. We're doing well with the business, but, we think, there's more upside opportunity. We want to leverage some of the platforms that we've introduced more completely with more accessible versions of those products for those products within those platforms, as well as actually creating unique innovation that is targeted towards that core, more accessible price point. And actually, amp [ph] up our storytelling around that product. We think that there's tremendous opportunity for us as well there.

Operator, we'll take the question, please.

Your next question is from Jamie Merriman with Bernstein. Your line is open.

Thanks. The first question is, Andy, you talked about that 30% Digital target that you laid out at Investor Day last year as maybe more of the mile marker. So I guess, can you talk about whether you think you will achieve that faster than what you had laid out? And then, what you think that ultimate opportunity is? And you used a reference 50% or 80% in other categories, I mean, how you get there? And then the second piece is, Mark, you mentioned that you're introducing RFID into footwear and non-licensed apparel. But how will that work with your wholesale partners who may or may not all have RFID capabilities? And what do you think that will enable NIKE to do?

All right. Jamie, I'll touch on your question regarding our long-term vision for digital. Frankly, we're not taking a year-over-year incremental rate of growth approach to Digital. Looking out longer-term, we do see the potential to have Digital be the majority of our business. And as I noted, when we look to other industries, which you referenced, other industries, consumer products industries, not just Digital or content industries, but other industries ranging from toys to electronics, books, et cetera, we see that in each of those industries, there was positive disruption that catalyzed that shift. And as the leader in our industry, we're going to continue to invest in this digital transformation of NIKE, and even more importantly, a consumer-centric digital transformation of the industry. Some examples of that are the services that we're providing within our NIKE App, the sneaker's app, which really has been a source of explosive growth. Our membership program, which, we believe, is a uniquely compelling proposition within this industry in terms of the friction that it removes for consumers and the personalization that it gives our consumers. And then as Mark touched upon on the call, we think, driving digital penetration in our industry also has quite a bit to do with leveraging the power of digital in the physical retail environment. And again, as we always have as NIKE, we tend to catalyze that change by putting innovative new experiences into the market, that then catalyze the change not only within our owned store base because that's something within our control but that's an example for the strategic wholesale partners that we've referenced. In terms of the experience, we would like to see them continue to evolve. So we're very ambitious, but we see the goals is very achievable when you look at benchmarks in other industries. So again it's less about when we would get to the 30%. And it's more about our extreme confidence that, that we're going to go well beyond that number over the long term.

And quickly on RFIDs, connected inventory is a way that will enable us to meet demand - consumer demand much more effectively, more efficiently. We're going to be scaling RFID and product as I mentioned throughout 2019. We'll be working closely with our retail partners, obviously and obviously all of NIKE Direct so that when consumers is really looking for product, we're in a position to provide it if it's not in the store that they're looking for. So we think that this, as Andy pointed out with the example in Korea, that, we think, that the opportunity here to affect the consumer - satisfying consumer demand is going to be actually pretty significant throughout the year. And that's just going to grow across 2019. So we're very bullish on that.

Operator, I think, we'll take one last question, please.

Your last question comes from the line of Jim Duffy with Stifel. Your line is open.

Thank you. Happy holidays, everyone. Great to see the innovation. It's great to see the innovation being rewarded, but building momentum. I want to talk a little bit about the Women's business in the context of the size of the opportunity, that's very encouraging. What's been the big unlock with the recent success? I'm sure there's more to it than just the other [ph] amplified? Are you speaking the female consumers in a different way? Or is there some sort of structural or cultural tailwind that's strengthened recently?

Well, as we mentioned, women's is outpacing men's growth for the quarter, and we see that continuing as we move forward through the fiscal year and beyond. I think there's a number of factors. I think women are embracing sneaker culture. We're seeing that with some of the iconic franchises that we've had like the Air Force 1 that are actually designed specifically for women with deeper insights, that, I think, resonate. And that's one example, but that's true across the product offering. Using the insights that we gain in that connection that we have with the female consumer, we're creating better product and we're seeing that reflected in the demand. The capsule collections that we've introduced in apparel Nike Metallic Sheen was one, Terra Perma was another capsule collection. Great response to those. I think it's relevant product in the end. Compelling relevant product is the foundation of that demand. And then, I think, the brand is actually speaking to women more directly and personally. And as I said in my remarks, that's going to be amped up throughout this 2019 as we head towards World Cup. You're going to see Just Do It with a big emphasis on women's. And then sports is affecting lifestyle and fashion in a way that we're seeing dramatic impacts around the world. There's a real appetite for more active lifestyle and that's expecting fashion and what - the product that we're creating is more sensitive to that and we're seeing the response from that work.

And you mentioned women's 25% of the business globally, can you speak about how that shakes out across the regions?

Sure. It's relatively evenly distributed across the regions. And from a categorical perspective, it's largely comprised sportswear, running and training, which is, in part, why it's relatively well distributed across the regions. In terms of the rate of growth, it's outpacing in all geos, outpacing the men's business. Now in terms of where opportunity is, as Mark touched on, we've got tremendous momentum, and that momentum is opening the aperture in terms of our vision in terms of where incremental growth is longer term. The women's footwear and apparel market is 1.5 times the size of the men's footwear and apparel market globally; and as you noted, it's less than quarter of our revenue. So we see extraordinary potential to drive continued strong growth and even step change growth as we really do two things, open the aperture in terms of the definition of sport, again, that's with a sharp focus on women and movement and activity. And then second, editing and more aggressively shifting resources within NIKE towards the women's opportunity. So in short, we've got great momentum in the women's business, but we're chasing something much bigger.

Thank you, Jim. Okay, that's all the time we have for today. Thank you all for joining us. Happy holidays. We'll speak with you next quarter.

This concludes today's conference call. You may now disconnect.