Dear Shareholders:
We have been told by a lot of really smart people that sports, or at least sports marketing, are dead. Games played by spoiled millionaires just don't have the impact they used to. And certainly those who play the game are long past the days when they could move product; the old formulas just don't work anymore.
Then along comes a group of young women, wearing USA across their chests, as they run through the best soccer teams in the world. The emotion they brought out on that July 10th afternoon . . . well, we just won't see its like for years, or even decades. And the singularity of that event didn't even last the month.
On July 25th, an athlete in a yellow jersey, riding a bicycle up the Champs de Elysses raced a memory of doctors and hospital beds and near-misses. Lance Armstrong didn't just win the Tour de France, the most grueling and demanding of all sporting events, he conquered death.
And by the way, we sold quite a few Mia Hamm shirts and yellow replica jerseys along the way. The emotion generated by sports not only sells product but is a great motivator for our employees worldwide, plus we can watch sports on TV all weekend and tell our spouses that we're doing research. Try to duplicate that somewhere else.
Likewise, Nike's death and its $31 stock price were slightly premature. And while this bit of news was not as dramatic as its counterparts on the pitch and the Champs de Elysses, the message is nonetheless just as strong. We are coming back. A rebound in slow motion is better than no rebound at all.
If sales and earnings were somewhat disappointing, a lot of the other news was very good. Gross profit margins rose from 36.5 percent to 37.4 percent. In view of declining sales, operating expenses were trimmed by almost $200 million. One of the most critical indicators in our industry - inventory - was reduced to healthy levels about as fast as we have ever done it in our four downturns.
Europe stays strong. Sometimes it feels like we get punished by Wall Street for growing quicker outside the U.S. We'll grant you it's a lot easier to walk down to the local mall to find out what's selling than it is to keep up with the latest trends in London or Milan. But that shouldn't obscure the fact that our business in Europe has been built on a solid foundation, and the perception of Nike as the local sports brand of choice continues to grow.
Asia is coming back. Despite the recent volatility, we continue to believe that the Asia Pacific region offers us our best opportunities for growth.
And we think we are seeing the bottom in USA apparel. Clearly, the apparel market has a greater variety of competitors than athletic footwear, and the past year proved to us that we need to be more responsive in this fast-changing business.
Most important of all, futures orders for the Company - the best barometer on our near term economic outlook - are going back up. Rest assured we will work hard to make the year 2000 a good year for all our shareholders.
I suppose it would be irresponsible for any Chairman's letter in the year 1999 to go without mentioning the Internet. The subject - and the stock valuations attached to Internet companies - dominates every business publication. While there is plenty of controversy swirling around this new medium, we absolutely believe it is creating an entire business revolution, and we truly intend to be a part of that revolution. If we had a clear-cut strategy I would not reveal it publicly, but ours is a strategy, that, in a word from that world, is iterating. You can get your best under-standing of that by watching our web pages. I believe you will see a lot of action in the next 12 months.
As we go off to get those sales and earnings up, we are reminded that ours truly is a unique business. We have similar goals as others, but different inspiration. Who else has Mia and Brandi and Michelle and Lance Armstrong to inspire them in a very personal way. How can we fail with those people in our corner?
Lastly, a word about Bill Bowerman, the most important coach of American track, Nike's co-founder and an original Board member. As Bill retires from the Board this year, his spirit and commitment to excellence will continue to guide Nike.
On a June day in 1959 as a 21-year-old University of Oregon senior I went over to MacArthur Court next to Hayward Field to clean out my locker for the last time. It was an emotional moment, but not as big as that which was to follow, as I went to go upstairs to the athletic department to say goodbye to Bill Bowerman, and tell him thanks for all he had meant to me. I had actually worked a couple hours on what I was going to say, but when I got there, I just couldn't get it out.
This spring Bill Bowerman moved from Eugene to Fossil, Oregon, the home of his youth and the current home of his son John. It is now a four-hour drive to Beaverton, something he has chosen at age 88 not to do five times a year. And so he decided not to stand for re-election to the Board. I find as I try to write a sentence or two on his meaning to the Company, that though many things have changed in the last 40 years, I am as paralyzed today as I was that June day in 1959.
So I will let somebody else's words do the work: "I have asked my son which of his instructors he considered had done the most for him and without a moment's hesitation he named you. I am sure there are many boys who feel the same as my son does, and I hope they have told you so. You are a teacher who is a friend and who imparts a spiritual development and inspiration." Mrs. Jay Bowerman, Bill's mother, wrote that in 1934 to Bill Hayward, her son's coach.
If words are not adequate to describe Bill Bowerman's contributions to Nike employees and shareholders, those of his own mother from 65 years ago come as close as I can get.
Philip H. Knight
Chairman of the Board and Chief Executive Officer
See note on page 27 regarding forward-looking statements.
Self-Examination
When asked to describe our fiscal 1999 financial performance, our President, COO and chief soccer junkie Tom Clarke characterized the year as "a hard-fought draw." Revenues decreased for the first time since 1994, down eight percent for the year. Three of our four regions were down in revenues with Europe the only exception. Revenues in Japan fell by one third. Michael Jordan retired. The National Basketball Association was forced to truncate its season due to a prolonged labor dispute.
Sounds like a recipe for disappointment and things certainly were headed in that direction if we hadn't chosen the path of vigilant self-examination. In our life as a public company, we have endured sales declines on several occasions. During those cycles we would put our heads down and plow ahead, firm in the belief that our vision was correct, but the execution may have gone a bit astray.
In fiscal 1999, we recognized that bumps in the road for a $9 billion company have a greater capacity to permanently injure than they did a few years back. Our size had become our greatest challenge. Running the same offense that we did in the past was not going to put us back on the path of growth.
So if fiscal 1998 was spent in the emergency room, fiscal 1999 was spent partially in post-op and partially in rehab. We put our organization under the microscope, seeking to define what Nike needed to look like on the precipice of a new century. And while we may not feel totally healed, we believe strongly in our future and our ability to make it happen.
We cut operating expenses by almost $200 million, enabling us to bring net income in relatively flat for the year when you factor out the restructuring charges. Every nook and cranny was examined. One result was an additional nine percent reduction in headcount. Not fun stuff, but necessary measures regardless.
We managed our balance sheet, cutting inventories by 14 percent and reducing working capital needs. We generated significant free cash flow, more than enough to pay for our dividends and share repurchase programs.
Looking ahead, we'll continue to look for opportunities to reduce our expenses. There may be less low hanging fruit after last year's cuts, but we'll strive to be lean so that we can remain nimble and in touch with the changing markets in which we operate.
USA. The story in the U.S. was really a tale of two businesses moving in opposite directions. Both NIKE and our retail partners finished fiscal 1998 with excess footwear inventory. That clearly impacted our ability to sell in new footwear in the first half of fiscal 1999, resulting in a double digit sales decline for the first six months. As the inventory started to clear out by mid-year, consumers reacted positively to our spring line of footwear, particularly the Tuned Air running shoes. The combination of cleaner inventories, some cool new shoes, and a more positive retail environment helped get our U.S. footwear business back on beam by fiscal year-end. For the first six months of fiscal 2000, futures orders for U.S. footwear were up three percent, leaving us optimistic that we have weathered a difficult stretch in that piece of our business.
Our U.S. apparel business - which exploded from $424 million in fiscal 1995 to $1.56 billion in fiscal 1998 - saw a decline for the first time since 1994. The growth in that three-year stretch put us at the forefront of the U.S. athletic apparel market but it also severely taxed our organizational resources. Throughout the year, the entire athletic apparel market was negatively affected by strong demand for a number of more fashion-oriented brands. We have realigned our organization to be more in sync with how consumers buy athletic apparel but are cognizant that the coming year will be a challenging one.
ASIA PACIFIC. The dramatic fall off in our Asia Pacific business at the end of fiscal 1998 pretty much ensured that 1999 was going to be a painful time. The economic crisis in Asia continued to weigh heavily on consumers and inventories were swollen, particularly in Japan. So things started off pretty much as we thought as revenues and, to a lesser degree, profitability, suffered steep declines in the first half of the year. Yet by mid-year, inventories, which were perhaps more of a problem than in the U.S. footwear market, had been reduced to manageable levels and it began to feel like we had touched bottom.
By fiscal year-end, there was even cause for some cautious optimism as futures orders moved back into a positive mode for the first time in 21 months. Two key global sporting events - the 2000 Olympics in Sydney and the 2002 World Cup in Japan and Korea - will take place in the region, and there is a great opportunity for these events to raise regional consumer interest in sport.
We talked earlier about vigilant self-examination. That effort was best exemplified in our actions in the Asia Pacific region. As part of the restructuring process begun late in fiscal 1998, we elected to consolidate our Asia Pacific management team to our world headquarters, effectively taking a big chunk out of the regional cost structure. Overall, we reduced costs by about $150 million in the region, but retained an organizational excellence that will enable us to grow profitably in the years to come.
AMERICAS. For the first time since the early '90s, our Americas region showed a decline in revenues. About half of that decrease came in Canada, where we were affected by many of the same issues that hit our U.S. business. In addition, the wobbly economic environment in Latin America (that's starting to sound familiar, isn't it?) hampered our growth, particularly in Brasil where our independent distributor was forced into bankruptcy early in the year.
So we adapted. We accelerated our plans to create a wholly owned subsidiary in Brasil. We developed plans to introduce locally-sourced, lower-priced footwear into key Latin American markets. And we're working on energizing the brand in Canada. Y'know, the year in the Americas region was probably more painful than two paragraphs might convey, but we have a good team in place to attack the problems in this region and there's a lot of young, healthy people living there who love sports. We like that equation.
EUROPE. Finally, some happy stuff to talk about. Our results in Europe over the past several years have been quite satisfying. While compounded annual revenue growth of 23 percent over the past four years probably isn't enough to quench the thirst of day traders out there, we consider it a very healthy number that's indicative of how much growth potential remains in our core business.
Just as it was last year, the growth in Europe was driven by apparel. We cracked the $1 billion mark in apparel for fiscal 1999, a number larger than total European revenues four years ago.
With revenues topping the $2.2 billion mark, it will be more challenging than ever to grow our business in Europe. Our size does provide us with the opportunity for leverage, be it through integrated pan-European campaigns, inspiring consumers at new Niketowns in London and Berlin, more efficient use of our Laakdal warehouse or, longer term, using the euro to move towards price harmonization throughout the region.
On the consumer front, our challenge is to keep our brand fresh and relevant to young consumers as we grow. We'll continue our City Attack campaigns with focused advertising in key European markets. And like in the U.S., we'll need to successfully navigate the road being blazed by the revolution in digital communications.
DING DONG, ENDORSEMENTS ARE DEAD. With all due apologies to our friends who do a nice business selling toothpaste and soda pop, we're really happy being in the sports business.
A lot of trees were killed this past year as the sports and business media wrote the death knell for athletes as endorsers. Interesting that we didn't see too many of those articles after 40 million people watched the U.S. women capture the World Cup. Or while Mark McGwire was busy crushing Roger Maris' home run record. Or when Maurice Greene and Hicham El Guerrouj respectively broke world records in the 100 meters and the mile, track and field's most prestigious events.
We could go on: Lance Armstrong's marvelous return from cancer to capture the Tour de France, Tim Duncan and David Robinson taking their dignity above the rim in the NBA Finals, Pete Sampras capturing his 6th Wimbledon. Truth is there are great sports moments happening everyday around the world. Some of them are played out on a global stage while others take place on school playgrounds, driveways and city streets. If our competitors wish to walk away from that emotion, so be it.
DOWN THE ROAD. OK, everyone who knows how e-commerce is going to work out raise your hand? What's that you say, you're too busy shorting Internet stocks to think about it? Frankly, we're not sure how this is all going to fall out either. We do know that the potential for selling consumer products over the Internet has caused everyone in our industry to revisit some very basics tenets of their business models and that is always healthy. We like our brand a lot and we're pretty enthused about this new avenue for communicating with our consumers. No promises, but we think some neat stuff is going to happen, and we plan on being part of it.
So, you ask, what's on the road ahead? Growth, we reply, and we say it with a tad more enthusiasm than we were able to muster at this time last year. We also recognize that it can't be growth for growth's sake, it must be profitable and sustainable. To achieve that goal, we cannot operate like the NIKE of old. Making compelling product in footwear, apparel and equipment remains at the forefront of what we do, but our responsibilities grow broader as we enter the next century.
We have gotten to this place by leading or failing but always taking chances. To capture the next leg in our growth, we must be responsive to consumer needs while helping energize their individual world of sports. In Fiscal 1999, we picked ourselves up off the mat. We are back in the game, scarred, but certainly a bit smarter for the experience. Now it's time for us to make good things happen. One last thing: Thank you Mr. Bowerman for making that very first good thing happen.