Nike, Inc. (NKE) Q1 2019 Earnings Conference Call Transcript

Nike, Inc. (NKE 1.20%)
Q1 2019 Earnings Conference Call
Sept. 25, 2018, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone. Welcome to NIKE, Inc.'s fiscal 2019 first 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 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 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 would like to turn the call over to Nitesh Sharan, Vice President, Investor Relations and Treasurer.

Nitesh Sharan -- Vice President of Investor Relations and Treasurer

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss Nike, Inc.'s fiscal 2019 first 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. 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 requeue, and we will do our best to come back to you. Thanks for your cooperation on this. I'll now turn the call over to Nike, Inc. Chairman, President, and CEO, Mark Parker.

Mark G. Parker -- Chairman, President, and Chief Executive Officer

Thanks, Nitesh. Hello and good afternoon, everyone. Last quarter, we described the growing momentum in our business. In Q1, that momentum, continued at a strong pace. We're capitalizing on the opportunities we see in the near-term, and we're diving deeper into the areas that will widen Nike's advantages over the long-term.

Through the consumer-direct offense, we're taking a winning formula and executing it across our complete portfolio. It's leading to the balanced growth that you see today. For the quarter, Nike, Inc. revenues grew 10% on a reported basis. Specific highlights include double-digit growth in our international geographies, and 6% growth in North America. Nike Digital is leading the way for differentiated retail, up 36% for the quarter. We saw acceleration in both our sportswear and performance businesses.

While this quarter's success was broad-based, and we're pleased with our momentum, we know we have even more opportunities ahead. As we've described before, a key focus that will create separation for Nike over the long term is our digital transformation. Ultimately, it's about becoming more personal at scale. Put simply, it's how digital is accelerating each of our triple double pillars. That's how we connect through 2X innovation, how we connect through 2X Direct, and how we serve through 2X Speed.

Let's look at the quarter through each of these lenses. The success we're seeing today starts with great product. It's ultimately where the consumer casts their vote. Our innovation platforms are building a foundation for growth over many years. As the taste of our consumers shift faster, strong platforms allow us to continually bring fresh products to market, while extending our storytelling and investment.

We're seeing it with Nike Air and React. Consumers are drawn to their comfort and performance, and they're asking for more style options. VaporMax and 270 are both proving there is still vast growth potential in Nike Air, as we develop more comfort innovation in new forms. This Spring, we're taking the exaggerated Air you see in the AirMax 270, and going a step further with the introduction of the AirMax 720. This new platform is engineered for maximum comfort, cradling the entire foot. The AirMax 720 is distinctly Nike. We'll deliver it to consumers in early 2019.

Nike React is a great example of how we've capitalized on the appeal of performance innovation, and immediately scales it into sportswear. The React Element 87 is considered one of the industry's top new designs. We've applied the comfort of React cushioning to more performance and lifestyle shoes at several price points.

Zoom X continues to power the world's fastest runners, including Eliud Kipchoje during his epic, world-record smashing run at the Berlin Marathon this month. This quarter, we took the magic of the Vaporfly 4% and merged it with an iconic running shoe, creating the Peg Turbo. The launch has created incredible energy for the whole Pegasus franchise, and help leads our overall running business to solid growth this quarter.

One of our most versatile and ever-advancing platforms is Flyknit. Through digital knitting, we can now place breathability, stretch, and support exactly where we need it. In basketball, for example, the KD11 and the LeBron 16 each leverage specific yarns and different knit structures to match individual athlete needs. The LeBron 16, with it's BattleKnit 2.0 has had a great early read with consumers, both men and women.

As part of our broader commitment to scale sustainable platforms, we're expanding Nike Flyleather through iconic styles like the Air Force 1, Cortez, and the AirMax 95. Flyleather is a super material that looks and feels like premium leather, but is lighter, more durable, and more sustainable. It uses at least 50% reclaimed leather, and helps eliminate waste. In the coming year, for the first time ever, Nike will bring digitally powered, adjustable footwear to professional sport. Building on the auto-lacing platform from HyperAdapt, this breakthrough creates a custom fit.

We had a group of elite athletes on campus this summer for an intense wear test. Their feedback was that they'd never felt more in control of their movements. This next-generation, adaptable innovation will set the standard for more optimal fit. We'll offer it at more acceptable price points and in greater quantities. In addition to platforms, we're executing the fundamentals across our categories at a high level right now. We know that it's newness and freshness that wins with the consumer today.

With our edit-to-amplify approach, we're providing deeper assortments and greater options of our top sellers. Our footwear power franchises, for example, consistently outperform or overall footwear sell-through. Apparel, too, continued this momentum with 11% growth driven by fleece, tops and bottoms, jackets and pants. We delivered a number of sportswear apparel collections over the last 90 days, like the City Ready and the Metallic Sheen collections in women's, and Nike Sport and Tech Packs and ACG. We'll continue on this path and extend into performance, because collections give consumers more complete looks and allow for better merchandising and storytelling.

Overall with apparel in our categories, we saw consistent sell-through of our football national teams collection drafting off the energy we created from the World Cup, where we had our first all-Nike men's final. The growth in our women's apparel business was led by sportswear and sports bras, where our strategy to blend style and comfort is working.

In Nike basketball apparel, we're capturing the excitement for LeBron's move to the Lakers. As you'll see in just a few weeks, we're bringing more creative designs with the NBA city jerseys this year. When we look across our complete portfolio of products, we still see areas with significant upside. We've talked before about the opportunity in women, in young athletes, in Jordan. Delivering innovation and fresh products in these areas brings balance to our portfolio.

A strong roster of core footwear at entry price points is equally important to Nike's overall growth potential. We're not yet where we want to be in core footwear, particularly in North America, but two priorities for the business are to develop innovation specifically for the core consumer, and to better leverage pinnacle performance platforms like Nike Air in this zone.

Another product strategy that's driving incredible energy is our ability to create unique intersections between sport and style across our brands. A few examples over this past quarter include the on-and-off court collaboration between Serena and Virgil Abloh for the U.S. Open; Converse's Limited Edition Chuck Taylors and One Stars with creative partners in fashion and music; and our first Jordan-brand football kit with PSG.

As I've said before, it's not lifestyle versus performance or fashion versus sport. The consumer continues to be inspired by seeing those worlds come together. Overall, 2x Innovation is at the heart of our continued momentum right now. We have versatile platforms, we're mixing sport and style in unexpected ways, and we have a deep lineup across our product portfolio that's creating value across all dimensions of our business.

While our product innovation is fueling demand, our 2X Direct strategy is driving new ways to connect with our consumers. It's building confidence in our vision for smart retail, where we remove friction and personalize experiences through the intersection of digital and physical environments. 2X Direct is in the early stages, and it's already creating an impact, resulting in strong growth and margin expansion for our Nike Direct channels. We continue to see unprecedented demand for our highest heat product through our SNKRS app, which has become the world's No. 1 footwear shopping app. We'll continue to expand the reach of SNKRS, launching in Mexico, Brazil, and Southeast Asia next quarter.

The Nike Live retail concept we unveiled with our Melrose store in L.A. was incredibly successful this quarter. The premise behind the concept is to create a live and ever-changing experience. We're testing a number of new features, including product assortments that update frequently, based on what's trending with the local consumer. A service that allows consumers to reserve an item on our apps and then pick it up curbside, or in the store from a personal smart Swoosh Text, our store athletes can now provide expert advice for consumers after they've left the store.

What we're learning in Melrose we're bringing to two new flagship stores in our two most important key cities: New York and Shanghai this next quarter. Both will be the culmination about all we've learned about personalized and experiential shopping over the last several years. They'll be incredible showcases for the Nike brand.

Our obsession with the store experience is also paying off with top strategic partners. While retail consolidation has not finished its course in North America, our growing Nike consumer experiences with Foot Locker, Nordstrom's, and other key partners are already driving higher growth rates, as compared to non-differentiated doors.

We're equally energized by the momentum we're building with new digital commerce partners. We just moved from a pilot stage to a fully operational program with Flipkart in India. Two weeks ago, we announced a new partnership with jet.com to sell selected assortments of both Nike and Converse in key cities in North America. With Jet, we're partnering to develop consumer insights and create a better branded experience on their platform.

We're doing the same with our key partners in China. This quarter, we made it possible to combine NikePlus member accounts to T-Mall accounts. We're seeing an impressive increase in new members in China as a result. Last week, we launched a partnership with WeChat, making 1 billion monthly active users just one click away from becoming a NikePlus member. Ultimately, companies will be judged on their ability to be more personal with their consumers at scale. Nike is taking the lead on this promise, leveraging more insights from all over the world, and reshaping the shopping experience through smart retail.

To make that a reality, we're unlocking opportunities to quickly and seamlessly design, manufacture, and deliver our products to consumers through 2X Speed. We're sharpening our sensing capabilities, and developing fully responsive product manufacturing. We're actively building a portfolio of innovation and automation that impacts the entire spectrum of our process. Our goals are ambitious and we have high standards. Our vision is to leverage automation to deliver amazing, innovative products, faster and more responsibly, while being more sustainable and cost-efficient.

We've had some great success. For example, we invented a flat assembly process for uppers in our advanced product creation center, at our world headquarters, using 30% fewer steps and 50% less labor. We tested this process with our partners, including Flex, and in our Asia store space, as well.

Transforming traditional footwear manufacturing is a significant undertaking. We've learned a lot and are building new high-impact capabilities, yet we continue to face specific challenges, together with our partners, including Flex, where the goal has been to deliver responsive, automated, close-to-market, manufacturing of high-quality products at scale. This is a dynamic process and we're continually assessing and refining the best path forward. Leveraging our breakthroughs in areas like rapid prototyping, 3D, and digital printing, and new methods of make, all in service of cutting the overall product creation cycle in half.

Another key initiative accelerating us toward that goal is the Express Lane, which continues to be the engine that's creating the most agility in our supply chain right now. We're driving double-digit growth in many of our key cities through the Express Lane, as we capitalize on the local energy for key icons, like the Cortez, and sports moments, like the World Cup.

With this end-to-end view, our entire value chain, we're delivering the right product to the right consumer in the right moment, and across product lines, throughout GOs and with our partners around the world, we're relentlessly driving speed at a scale that is creating impact for our business. We're off to a great start in Q1, managing the dynamic environment. More importantly, we're setting a new foundation for long-term, sustainable growth for years to come. Thanks, and now here's Andy.

Andy Campion -- Executive Vice President and Chief Financial Officer

Thank you, Mark. Good afternoon to everyone on the call. We're extremely pleased with the quality of the growth that we delivered in the first quarter. On a currency-neutral basis, we're delivering stronger, more broad-based momentum around the world than the expectations we set entering the fiscal year. We had continued strong growth in international markets, led by Greater China growing at 20%, and our international growth is now being amplified by very strong, sustainable growth in North America.

As for the quality of our growth, our momentum continues to be directly tied to execution of the consumer-direct offense and, more specifically, the triple double. First, take for example, our 2X Direct initiative. 2X Direct is about connecting the Nike brand more directly to our consumers. Today, the most direct connection to the consumer is through the mobile device in the palm of their hand. In Q1, we continued to enhance and expand our Nike Digital ecosystem, leading with mobile, and the result was 36% Nike Digital growth. Nike Digital was once again our fastest growing channel in each and every geography.

Now, while Nike Digital is leading the way, we believe physical retail will also play an important role in doubling our direct connection to consumers. We see growth in the physical environment being driven by smarter retail, experiences that leverage digital technologies to better serve consumers. In Q1, our vision for physical retail became more tangible. We continued to roll out what we're calling the Nike App at Retail, starting with our own in-line stores.

We also launched a new concept called Nike Live. The Nike Live concept came to life in Q1 through the opening of Nike By Melrose in Los Angeles. Nike Live leverages our NikePlus membership platform and other digitally enabled services to provide a truly differentiated consumer experience at retail. The results to date have been phenomenal. For example, at Nike By Melrose, the conversion of in-store shoppers into digital NikePlus members is 6 times higher than in the rest of our fleet, as consumers seek to gain the full benefits associated with being more directly connected to Nike.

Our approach has been to test, learn, and then scale new concepts such as these. Accordingly, we're not in the process of scaling these new concepts across our fleet of owned stores, and these tangible proof points are also accelerating new concept development with our strategic wholesale partners.

2X Innovation is another key pillar within the consumer-direct offense that is fueling or broad-based momentum. Suffice it to say that our recently launched innovation platforms, VaporMax, AirMax 270, React, and Zoom X, have already generated in aggregate, over $2 billion in revenue at retail. Further, these platforms are driving brand distinction and catalyzing growth across our broader product portfolio in both performance and sportswear. For example, as Mark noted, the new innovation we are bringing to the Nike Air franchise has ignited double-digit growth across our multi-billion-dollar family of Nike Air products.

Newness and innovation are also favorable impacting our gross margin, as our full-price sell-through is significantly outpacing off-price sales. Our current inventory levels are also tight in relation to this strong demand that we're creating. Underlying our strategic momentum is the digital transformation of Nike that Mark mentioned. A year ago, we aligned our teams around the world on our new strategy, the consumer-direct offense. Over the past year, we've been ramping up investment in the new digital capabilities that will reshape how we operate at Nike for the long term. Our investments in new digital capabilities are coming in the form of both organic development and acquisition.

As we closed fiscal year '18, we announced the acquisitions for Zodiac and Invertex, both of which are already having a profound impact on how we better serve consumers. Another acquisition that we made back in fiscal year '17 was Virgin Mega. That team has now become known as Studio 23, a digital hub in New York that's driving the explosive growth of the SNKRS app.

Within fiscal year '19, we're also investing significantly in the organic development of new capabilities, including digital demand sensing, consumer data and analytics, connected inventory, digital product design and creation, a digital content engine, and a new enterprise resource platform that will help unlock speed and flexibility in our supply chain. As our long-term financial model implies, we believe that Nike's unrivaled scale and resources afford us the ability to over-index on investment in these differentiated capabilities, while still delivering expanding profitability over the 5-year horizon.

Execution of the consumer-direct offense is clearly beginning to transform Nike's business model, and how we will create value for shareholders over the long term. So, let's recap Q1 results in a bit more detail with a focus on how strategic execution is the driving force behind our current financial performance.

Nike, Inc. Q1 revenue increased 10%, up 9% on a currency-neutral basis. Our stronger-than-projected currency-neutral growth was driven by acceleration in North America and continued strong momentum in international markets, albeit slightly offset by FX dynamics within the quarter.

Our growth across geographies was led by Nike Direct, with Nike Direct growing 12% and Nike Digital growing 34% on a currency-neutral basis. The impact of innovation, Nike Digital growth outpacing all other channels, and our tighter supply and-demand management also fueled roughly 50 basis points of Nike, Inc. gross margin expansion in Q1.

Demand creation grew 13% in the first quarter, primarily driven by sports marketing investments, as well as brand campaigns that amplified key moments in sports, such as the World Cup. Operating overhead increased 5%, driven by investments in digital capabilities, as well as in our supply chain and enterprise technology platforms.

Our effective tax rate for the quarter was 14%, which reflects the implementation of U.S. tax reform. First quarter diluted earnings per share increased 18% to $0.67. Finally, as of August 31st, inventories were flat to prior year, primarily driven by a strong pull market across all geographies, coupled with the efforts we have taken over the past year to right-size supply.

Now, let's turn to the financial performance for our reported operating segments. In North America, we have returned to strong, sustainable growth. Q1 revenue grew 6% on a reported and currency-neutral basis, led by accelerating growth across both footwear and apparel, driven by new innovation platforms, as well as strong owned and partner digital growth. Wholesale has also returned to growth, yet we see even greater opportunity to drive differentiation across the wholesale marketplace going forward, in part by leveraging our learnings from the Nike App at Retail and Nike By Melrose.

Another growth opportunity we see ahead of us in North America relates to the Jordan brand. In the second half of fiscal year '18, we tightened supply. We also reset our approach to Jordan Retro, creating more current stories and collaborations with respect to Jordan's most iconic styles. We're now bringing those icons to life in more compelling ways for the new generation of Jordan consumers. And as a result, the Jordan brand is back to a pull market. We're also beginning to add greater dimension to the Jordan brand. For example, for women, we're extending sizes in the icons we know they already love, and also creating silhouettes and new collaborations made specifically for her.

Apparel and performance basketball also represent significant growth opportunities going forward. As the football and basketball seasons ramp up, our brand momentum will continue to build in North America. At the same time, we're not taking that momentum for granted. We continue to identify and attack opportunities to elevate our game, and drive strong, sustainable growth in this important geography.

So, now let's turn to EMEA. In EMEA, Q1 revenue grew 9% on a currency-neutral basis, driven by strong growth in sportswear, and healthy growth in running and Jordan. Nike Digital led all the mentions of the marketplace, growing at a strong, double-digit rate. One of the underlying drivers of our sustained growth in EMEA is the strength of our brand across this diverse geography. EMEA is home to 5 of our 12 key global cities. And in all 5 of those key cities in EMEA, Nike is rated No. 1 by consumers, and our growth is over-indexing the broader market.

By connecting more deeply with consumers in key influential cities, and by amplifying the biggest moments in sport, Nike is creating increasingly greater distinction as a brand in Europe. One of those sports moments was the incredibly exciting World Cup, in which both of the finalists were Nike teams. Soon after the World Cup final, we launched our Awaken the Phantom campaign, generating over 50 million views in the first two weeks, and driving strong sell-through on the launch of our newest global football franchise, The Phantom.

And finally, after celebrating the French national team's World Cup victory, we continued to bring energy to global football with the launch of a Jordan-branded, Paris St. Germain team kit and collection of apparel. That launch has been phenomenal, with the key style selling out immediately.

While Nike has become the leading brand in EMEA, we're far from having achieved our full potential. We see the opportunity to both grow the market for athletic footwear and apparel across Europe, and also create even greater separation from the competition as a brand. That is why we believe we can sustain the strong growth in EMEA over the long term.

Next, let's turn to Greater China, another geography in which the Nike brand continues to lead and sustain strong growth. We've now delivered 17 consecutive quarters of double-digit revenue growth in Greater China. In Q1, Greater China's growth was 20% on a currency-neutral basis, fueled by sportswear, Jordan, basketball, and across women's and young athletes. Growth was also strong and balanced across both footwear and apparel. We are winning with the Chinese consumer, first and foremost through the key cities of Shanghai and Beijing.

We're also continually innovating in this large, digitally native marketplace. Nike Digital growth remains strong, and actually accelerated in Q1. We're also driving growth through our partnerships with China's leading digital platforms like T-Mall and WeChat. Finally, we're beginning to leverage digital in the largely Nike-branded physical retail environment in China. Take, for example, our partner, Baileigh, which was acquired last year by Hillhouse, a leading firm in technology and consumer services. Baileigh has already rolled out connected inventory that enables a more direct Nike consumer experience with a faster and easier way to fulfill consumer demand, fully leveraging their roughly 2,500 touch points.

Now, let's turn from China to another fast-growing and fast-developing geography -- APLA. In Q1, APLA revenue grew 15% on a currency-neutral basis, fueled by balanced, double-digit growth across footwear and apparel, and led by Japan, Mexico, and Korea. Two areas of increasing focus for us in APLA have been our women's business and digital. Women's growth continues to accelerate, driven by distinctive brand-marketing campaigns, such as the Come Out in Force and Rally Cry campaigns, focused on inspiring and empowering women through sport.

Nike Digital is also accelerating in APLA, with revenue growing over 70% in Q1, the highest rate of growth across all of our geographies, as we continue expanding our digital ecosystem across this region. We will continue to sustain strong growth as we roll out the Nike SNKRS app in markets such as Mexico and Brazil, and bring the Nike Live retail concept to Tokyo later this fiscal year.

Beyond Nike Direct, we're also expanding our digital connectivity to consumers across this region through entrepreneurial commerce partnerships, such as those with Flipkart, Zozotown, and several others. We see continued momentum in APLA over the course of fiscal year '19, and we will continue to invest in this fast-growing, diverse geography as we move even closer to the Tokyo Olympics in 2020.

Finally, at Converse, revenue increased 7% on a currency-neutral basis. Growth was fueled by double-digit revenue growth in Greater China, and strong double-digit growth digitally. That said, Converse also experienced declines in undifferentiated wholesale, primarily in the U.S. and the U.K. As we move through fiscal year '19, we will be expanding Converse's product portfolio, while also elevating the Converse-branded digital ecosystem.

We are off to an even stronger start to the fiscal year than we initially expected. Our currency-neutral growth and profitability is exceeding our expectations. At the same time, global trade uncertainty and geopolitical dynamics have resulted in the dollar strengthening and foreign exchange shifting to a slight headwind over the past 90 days. Taking into account all of these dynamics, we are maintaining our full-year guidance for fiscal year '19.

Specifically, we expect revenue growth in the high single digits, albeit at the lower end of that range, as operational upside will likely be somewhat offset by FX headwinds. We expense gross margin to expand 50 basis points, or slightly greater; SG&A to grow in the high single digits, and our effective tax rate to be in the mid teens. Other expense, net of interest expense, is now projected to be an expense of $100 to $125 million.

Based on the FX volatility of late, let me briefly explain more specifically how FX impacts Nike's financials in the short term. First, it is important to note that the revenue line item in our P&L is essentially unhedged. Therefore, our reported real dollar revenue growth reflects nearly all currency movements real-time. We do have a robust hedging program that delays the impact of FX on our profitability for 12, to as much as 24 months, most notably with respect to developed market currencies, for example, the euro. However, it is not economical to hedge FX risk in many emerging markets, such as Turkey, Argentina, and Brazil. As for China, we're able to partially, but not fully, hedge our net exposure.

Our focus is on sustaining strong, currency-neutral operating momentum over the full-year, and even more importantly, over the longer term. But I'll provide a bit of context on Q2. For Q2, we expect strong currency-neutral revenue growth in line with the 9% currency-neutral revenue growth we delivered in Q1. That said, taking into account real-time FX dynamics, reported real dollar revenue growth for Q2 is likely to be 2 to 3 points lower than our currency-neutral revenue growth.

For gross margin, we expect Q2 expansion approaching the same level of expansion that we delivered in Q1. As a reminder, we expect less gross margin expansion in the first half of the year, as compared to the second half of the year. In Q2, we expect SG&A growth in the low teens, driven by the timing of our investments in sports marketing, including the kickoff the NBA and NFL seasons, and the timing of strategic investment in new digital capabilities. For other expense net of interest expense, we expect expense to be in the $30 to $40 million range.

Our execution of the consumer-direct offense is creating brand distinction with consumers around the world, and driving strong financial performance. At the same time, we see ourselves as being in the early stages of this transformation. There is no finish line for Nike, particularly as it relates to digital. So, we will continue to invest in the capabilities that will differentiate and create competitive advantage for Nike long term. Those capabilities include product innovation, brand marketing, digital, and speed within our supply chain.

We are thrilled with our momentum out of the gate in fiscal year '19. And nonetheless, we remain on the offense, identifying and attacking opportunities to elevate our game, build on our momentum with consumers, and ensure that we deliver sustainable, profitable, capital-efficient growth over the long term. With that, we'll now open up the call for questions.

Questions and Answers:

Operator

At this time, if you'd like to ask a question, please press * then the number 1 on your telephone keypad. Your first question comes from Kate McShane with Citi. Your line is open.

Katharine McShane -- Citigroup Global Markets -- Analyst

Hi, good afternoon. Thanks for taking my questions. When looking at the 6% North America growth that you saw this quarter, I wonder if you could help us understand how much is being driven by AFP growth versus unit growth? And how much of a drag is the undifferentiated retail?

Andy Campion -- Executive Vice President and Chief Financial Officer

Hi, Kate. It's Andy. I'll take that one. In North America, we're actually seeing expansion in average selling prices, as well as units. Our growth is relatively well balanced, as you saw in our reporting across footwear and apparel. So, it's very strong and balanced growth. We see that strong and balanced growth continuing over the balance of the year.

Katharine McShane -- Citigroup Global Markets -- Analyst

Okay. Thank you for that.

Andy Campion -- Executive Vice President and Chief Financial Officer

I'm sorry, Kate. As for undifferentiated retail, as I mentioned, we're seeing growth across all dimensions of the marketplace. We have had relatively strong growth with our strategic wholesale partners, being Foot Locker, Finish Line, Dick's and others. That's being driven by the elevation of the consumer experience with those partners, and also by the extraordinary impact of the new innovation and newness that we're bringing to our product portfolio.

We're in the early stages of some of the more truly transformational change, but what we're really encouraged by is that the learnings that we're having, particularly with the Nike App at Retail, and Nike By Melrose, in other words, the Nike Live concept. Those conversations are really picking up steam in terms of new concept development, that we see a great opportunity for across that bricks-and-mortar fleet in wholesale.

Mark G. Parker -- Chairman, President, and Chief Executive Officer

I'll add that the demand that we're seeing in North America is actually quite balanced across the portfolio and on top of that, the inventory situation is actually quite clean as that demand has been increasing. So, we're in a good position here.

Katharine McShane -- Citigroup Global Markets -- Analyst

Okay. Thank you very much.

Nitesh Sharan -- Vice President of Investor Relations and Treasurer

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

Operator

The next question comes from Bob Drbul with Guggenheim. Your line is open.

Robert Drbul -- Guggenheim Securities -- Analyst

Hey, guys. Good afternoon.

Mark G. Parker -- Chairman, President, and Chief Executive Officer

Hi, Bob.

Robert Drbul -- Guggenheim Securities -- Analyst

I guess the question that I have is more of a bigger picture question for you. I was wondering if you could address your demand creation advertising marketing approach. There's been a little bit of news the last couple of weeks, and some controversy around it. I was just wondering if you could maybe address how you approach these types of situations, the concerns that you have, but the benefits that you see around certain campaigns.

Mark G. Parker -- Chairman, President, and Chief Executive Officer

Generally, we're motivated to inspire our consumer to connect, to engage, and inspire. We feel actually very good and very proud of the work that we're doing with Just Do It, introducing Just Do It to a new generation of consumers, on the 30th anniversary of the campaign when it first debuted. We know it's resonated actually quite strongly with consumers. Obviously, here in North America, but also around the world. It's really transcended the North America market to touch people around the world.

We have an incredible lineup of athletes in that spot. When you look at the Just Do It campaign, the list of athletes we have there, it's actually quite impressive, including Serena, O'Dell, Colin, Shakim Griffin, Lacey Baker. These are actually very inspiring athletes. Again, we feel like the campaign has delivered on that message in a way that's really connected with people around the world.

Like any campaign, not any campaign, but many campaigns, it's driving a real uptake in traffic and engagement, both socially, as well as commercially. We've seen record engagement with the brand as part of the campaign. Our brand strength, as you well know, is a key dimension that contributes to the ongoing momentum that we're building across the Nike portfolio. That's really how we look at it is how do we connect and engage in a way that's relevant and inspiring to the consumers that we're here to serve.

Robert Drbul -- Guggenheim Securities -- Analyst

Great. Thanks. I guess the same question I have is, after this weekend's golf results, I was wondering if you have any perspective of how Phil Mickelson feels ahead of the match-play even in November with Tiger?

Mark G. Parker -- Chairman, President, and Chief Executive Officer

Yeah, he's probably feeling a little more pressure, I would imagine. It's great to see Tiger back, and the reaction to his performance on Sunday was pretty inspiring. Yeah, I think Phil might be feeling a little bit of that pressure.

Nitesh Sharan -- Vice President of Investor Relations and Treasurer

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

Operator

The next question comes from Lauren Cassel with Morgan Stanley. Your line is open.

Lauren Cassel -- Morgan Stanley -- Analyst

Great, thanks so much, and congrats on a great quarter. First, is there any color you can share on North America DTC growth specifically during the quarter? Just bigger picture, there's been some caution or nervousness in the market about potential slowdown in the Chinese economy and consumer spending there obviously you guys delivered some really nice growth there this quarter. But are there any signs or signals that you're seeing that would suggest a slowdown there? Thanks so much.

Andy Campion -- Executive Vice President and Chief Financial Officer

Sure, I will North America Nike Direct or DTC, as you put it. I'll hit it on all three dimensions. We had extremely strong double-digit growth in digital and acceleration in that regard. We have taken a number of actions to remove friction, enhance the consumer experience, allocate product to that channel, where we know consumer demand is robust. And we're actually using data and demand sensing to better line up supply with demand digitally. So, incredibly strong growth digitally.

In our in-line stores, we're actually seeing strong comps as well. We've seen traffic up and, even more notably, conversion. Conversion in the in-line stores we're seeing as a direct results of two things. One, the brand distinction that Mark mentioned in response to the last question, as well as the product that we're bringing to market. We're seeing incredibly strong full price sell-through on our line right now. Our close-out mix is down in inventory, and our off-price sales are down as a percent of total.

In our factory stores, our factory stores continue to be a very profitable dimension of the business. Frankly, the only challenge I would really highlight in our factory stores is that its full price sell-through is so strong in in-line and digitally, it leaves some gaps in terms of the assortment that we bring to market in the short term and in our factory stores. But we've identified opportunities in that regard, and are looking at supply to fill those gaps. Again, it's a nice problem to have.

Mark G. Parker -- Chairman, President, and Chief Executive Officer

Let me touch on China. As Andy had mentioned in his remarks, we've seen 17 consecutive quarters of double-digit growth and really strong underlying fundamentals in the market, things, factors like the growth of the middle class, the sports participation obviously a very digitally savvy consumer. We're well positioned in that regard in the marketplace in terms of the Nike brand and it's position. We have a very strong connection with the Chinese consumer; we have for a long time. We're leading the market in digital, growing 40% in Q1. We've had great relationships with our digital partner there. I mentioned T-Mall. WeChat is starting out with tremendous potential there.

There's great momentum in the marketplace and across multiple categories -- sportswear, running, basketball. The Jordan brand is incredibly strong in China. Our fundamentals in China are actually quite strong and sound. We're not seeing any pushback from consumers. On the contrary, our relationship and connection to consumers is as strong as it could possibly be. We feel confident in our ability to continue to grow. That's reflected in our outlook for China over this next year. We feel like there's great momentum, and that we're in a great position for that to continue.

That said, we're mindful of the dynamics, but we are focused on serving that Chinese consumer, strengthening our position there. I'll just close by saying we are among the most popular brands with the Chinese consumer.

Lauren Cassel -- Morgan Stanley -- Analyst

Great, thanks so much.

Nitesh Sharan -- Vice President of Investor Relations and Treasurer

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

Operator

Your next question from Jim Duffy with Stifel. Your line is open.

James Duffy -- Stifel, Nicolaus -- Analyst

Thank you. Good afternoon, everyone.

Mark G. Parker -- Chairman, President, and Chief Executive Officer

Hi, Jim.

James Duffy -- Stifel, Nicolaus -- Analyst

Good balance in the quarter. A lot of good indicators. The inventory looks well managed, and you're seeing strong results in D to C, and you also spoke about improving margin from D to C. I'm wondering, can you speak about some of the elements of cost inflation that are offsetting the mix benefits in the gross margin? Andy, can you detail the FX impact considered in the gross margin outlook for the year?

Andy Campion -- Executive Vice President and Chief Financial Officer

Sure, I'll hit both dynamics, cost and FX. Let me first give you a little bit of overall context on our margins. We're seeing strong structural improvement in our margins. That's being driven by the innovation we're bringing to market, and in turn, the full-price versus off-price mix. Second, it's being driven by the over-indexing growth in our Nike Digital business. It's also being amplified by the initiatives that we have around product cost management.

In the first half of the year, there's one element of material, so to speak, that is a bit of a headwind and that's in the chemical space, mainly rubber. That will ease in the second half of the year. As we look at FX as well, FX is much more of a tailwind in the margin line item of our P&L in the second half of the year, as compared to the first half of the year. So, if I refer back to the guidance that we gave as we entered the year and we reiterated today, we have strong gross margin expansion forecast for the entire fiscal year. At the same time, we see slightly less margin expansion in the first half and more margin expansion in the second half.

James Duffy -- Stifel, Nicolaus -- Analyst

Very good. Mark, one for you. Last 9 months, particularly strong period for new product introductions and bringing new innovations to the marketplace. Can you talk about how to think about the cadence from here? Will there be a gap or is there a predictable launch cycle you expect to work with as we look out over the next couple years?

Mark G. Parker -- Chairman, President, and Chief Executive Officer

Yeah, our 2X Innovation initiative is really all about a steady flow of innovation. I feel very positive, very confident with what's in the innovation pipeline and what's coming. I mentioned a couple of things earlier. The new iterations of our Air cushioning platform with the 720, a very exciting product that's building on the VaporMax 270. So, that's exciting. I also mentioned the adaptable adaptive footwear technology coming into performance sport. You'll see that on professional athletes very soon.

We have an incredible lineup coming throughout the fiscal year of product. We're actually focusing on bringing innovation into the core price points as well. So, we have a balanced portfolio of innovation across both footwear and apparel. Then we have opportunity to further dimensionalize the incredible platforms that we've got. I mentioned Air, React, Zoom X. There's still a tremendous amount of potential to leverage those both in performance across categories and also across sportswear.

Then I have to tell you, I can't really shed too much light on this at this stage, but my excitement around what's coming as we, believe it or not, ramp up our portfolio around the Tokyo Olympics. Nike, that's always a time where we showcase our innovation and the build up to the Olympics is an incredibly exciting time for Nike, and the innovation that we deliver. I guarantee you we won't disappoint with some of the things we have coming up. You'll start to see some of that ramp up over the next 12 to 18 months.

James Duffy -- Stifel, Nicolaus -- Analyst

Thank you.

Nitesh Sharan -- Vice President of Investor Relations and Treasurer

Thank you, Jim. Operator, we'll take two more questions. Next question, please.

Operator

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

Paul Trussell -- Deutsche Bank -- Analyst

Good afternoon. Solid results. Just on North America, given the acceleration that we saw throughout the first quarter, is it fair to assume that the exit rate what's more in the high single-digit range and, while I know overall global revenue outlook has not changed, has your thought process on what is achievable in North America maybe been upped a little bit?

Andy Campion -- Executive Vice President and Chief Financial Officer

Thanks for the compliments, Paul. I'll take that one. Our goals for North America are long-term focused. It's a large, important geography. As you may recall at our investor day in October, we said we were targeting mid single-digit revenue growth over the next 5 years, as we innovate within the marketplace from a digital perspective and transform the broader retail landscape. On that note, we said there might be some disruption in the short-term as well. So, to some extent, we hedged a little bit with respect to fiscal year '19.

To be clear, we returned to strong growth in North America even faster than we had expected. We have demand that is outstripping supply. You say our inventory in North America was flat. So, what we're focused on, and we're always focused on, you can rest assured, is capitalizing on every opportunity that we see to serve demand in the North America marketplace. We're not providing specific guidance from a geo-perspective, but I will tell you that the brand is incredibly strong, our product is resonating, sell-through is strong.

And even beyond what's working and what you can see in our numbers, we see opportunity to go beyond that and potentially even more importantly, drive that sustainable growth over that 5-year horizon. Those opportunities fall under the overall umbrella of what Mark often refers to as our complete offense. At any given time, even when we have extraordinary momentum, there are areas underneath that umbrella where we see greater opportunity than we're capitalizing on. Specifically in North America, I touched on Jordan. We see acceleration in Jordan over the coming months and certainly out of this fiscal year and into next year.

Women's is growing strong. Women's was a very strong dimension of growth for us as a company, but we see even more opportunity. It's not so much about the rate of growth. It's how much more opportunity is out there in the women's business, especially around athletic footwear and apparel. Then finally, another huge opportunity in North America is our youth athletes business. It may surprise some people to know that it's one of our largest categories.

At the same time, we see the opportunity to bring new materials, colors, prints, and even designs directly targeted at young athletes. We have a silhouette called the future series, which is actually an innovation that's made specifically for kids. So, we do see a tremendous amount of opportunity in North America. Suffice it to say we're really pleased with the momentum we have and we're bullish on being able to sustain growth in North America in fiscal year '19 and beyond.

Then you also asked about global growth. You made a comment that said it's pretty consistent. I just want to be clear. On a currency-neutral basis, our momentum on the top line from a revenue perspective is stronger globally than we expected when we came into the year. While we maintained our high single-digit reported revenue growth guidance, that takes into account that over the last 90 days since we last spoke to you, FX has been pretty volatile. As I touched on, that line item in our P&L is essentially unhedged. So, while we protect the profitability through hedging, we see those impacts real time and that's also why I gave you a little bit more color on Q2 guidance.

Nitesh Sharan -- Vice President of Investor Relations and Treasurer

Thank you, Paul.

Paul Trussell -- Deutsche Bank -- Analyst

Thanks for the color on that.

Operator

Your last question comes from Jamie Merriman with Bernstein. Your line is open.

Jamie Merriman -- Bernstein -- Analyst

Thanks very much. Andy, you touched on how you're using data a little bit earlier, but I was wondering if you could just talk a little bit more about is it inventory allocation by channel, by geography? Is some of that data starting to help drive your product creation efforts, and are there other ways that it's being deployed at this point? Then just a follow-up. You talked about the jet.com partnership. Can you just talk about those that compares to the Amazon partnership? Thank you.

Andy Campion -- Executive Vice President and Chief Financial Officer

Sure. I'll start with data and analytics. It is truly an end-to-end initiative at Nike. It starts with consumer data and analysis around consumer data, and I'd say that is manifesting itself right now, already, and most importantly in terms of digital demand sensing. Us continuing to leverage the intuition that we have, then amplifying that intuition with real data as to what consumers' preferences are. One of the best examples is Nike By Melrose. That store, that Nike Live store in Los Angeles, the entire assortment is based on data that we're analyzing around what consumers in those zip codes have purchased and are interested in and some of the key themes.

You move from digital demand sensing to digital product creation. So, taking that insight and designing and creating product leveraging digital technology that allows us to bring that insight to life in a product faster. Then absolutely we're using data in our supply chain to tighten our demand and supply management. You see that already beginning to impact our full-price versus off-price sell-through. On the very front end, of course, from a consumer perspective, data and analytics helps us personalize the consumer experience on the Nike app, as well as the SNKRS app. And even in our physical retail environments as we use things like the Nike App at Retail.

In that regard, one of the most notable successes or pilots early on has been connected inventory. So, using RFID and using data and analytics in terms of where our inventory is and where our consumers are looking to buy to get them the product they want more seamlessly.

Then as for your second question, you asked about jet.com and how that might compare to some of our other partnerships. I'll say that Mark will probably want to add something here. We're excited about this partnership with Jet because it is a partnership that is really about creating a compelling consumer experience around the Nike brand, leveraging Nike membership to help better serve consumers in that channel, helping ensure that there's a clean assortment of product that's presented to that consumer across the marketplace. There are several aspects of it that we view as distinctive in terms of the offering that we'll make to consumers. At the same time, it's one of several initiatives across a range of digital commerce platforms.

Mark G. Parker -- Chairman, President, and Chief Executive Officer

I'll just add on Jet, we're starting off with a more focused pilot as we look at offering a select amount of product in key cities across North America. It's an assortment that's tailored to those consumers, what we would call a brand-friendly shopping experience. We're looking at our digital partners to help co-create elevated consumer experiences in how they partner with Nike, so we can work together on advancing our connection to consumers through digital commerce.

We are looking at how we partner with these digital platforms to advance the consumer connection in terms of product selection, in terms of personal service, in terms of how the brand is presented online. We're optimistic and feel very strong that the relationship with jet.com is going to offer us those opportunities. We're excited about that.

Our business with Amazon is performing well. Not a huge update here, other than we've seen really good sell-through on a limited selection of products that we've offered. We've said before that we want to work together to elevate the consumer experience, and that's important in any digital partnership that we enter into. We get the most of our relationship when we work together to elevate that brand presentation.

One of the things we're going to continue to focus on is how we share data with our digital partners to advance that consumer experience. But we feel like the partnership with Amazon is moving toward a mutually beneficial space. So, we're actually feeling good about where we are. It's important that we stay focused and continue to look for those opportunities together.

Jamie Merriman -- Bernstein -- Analyst

Thanks very much.

Nitesh Sharan -- Vice President of Investor Relations and Treasurer

Thank you, Jamie. All right. Well, that's all the time that we have for today. Thank you, everyone, for joining us. We look forward to speaking with you next quarter. Take care.

Operator

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

Duration: 64 minutes

Call participants:

Mark G. Parker -- Chairman, President, and Chief Executive Officer

Andy Campion -- Executive Vice President and Chief Financial Officer

Nitesh Sharan -- Vice President of Investor Relations and Treasurer

Katharine McShane -- Citigroup Global Markets -- Analyst

Robert Drbul -- Guggenheim Securities -- Analyst

Lauren Cassel -- Morgan Stanley -- Analyst

James Duffy -- Stifel, Nicolaus -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Jamie Merriman -- Bernstein -- Analyst

More NKE analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.