The battle for dominance in the athletic footwear and apparel market is starting to take shape as a global game as adidas Group and NIKE, Inc. start to battle it out for market share on a region-by-region, country-by-country basis. While Nike is still showing strength in the U.S., Latin America, and emerging markets, their chief competitor is now putting much more pressure on them in Europe and Japan. adidas recently reported that it had grabbed the top market share spot in Japan and NKEs fiscal Q2 report appears to add credence to that claim. In Europe, the World Cup has set the stage for a fight for the top spot in soccer, a fight adidas (and Puma) are more than willing to over-invest in in their home country.
Still, Nike, Inc. CEO Bill Perez feels they have the right strategies in place to double the size and value of the NKE business, not a small task when you are the biggest kid on the block by a long margin. While most of the market views Nike as the 900 lb. gorilla in the sporting goods business, Perez takes a much more conservative view of their position in the market. While most look at the Nike brands 40%+ share (and 60%+ at many retailers) of the U.S. athletic footwear as a clear dominant position, Perez holds that Nike, Inc. the company only has a 25% of the total U.S. market by his measurement. He is obviously taking a big picture view here.
The company just completed a strategic review of the business, resulting in a renewed focus in a few key areas that are expected to further improve growth and profitability.
First, the company is expected to become much more aggressive in emerging markets. Perez cited a strong focus on Brazil, Mexico, India, and China as key markets. China was defined as a long-term strategy and not one that sees the 2008 Olympics as the finish line. The very successful Zoom LeBron III launch in China and the U.S. was punctuated by the performance of the Limited Edition of the shoe that sold out in China in two hours at $250 per pair. In India, Nike just inked a $44 million deal to supply the India National Cricket Team after strong competition from both adidas and Reebok.
Second, NKE expects to be more aggressive and focused on its direct-to-consumer business. Management reiterated its commitment to retailers as the first line of attack, but they stipulated that they will support the retailers that partner with them on broader brand presentations.
Other elements of focus will include the continued alignment of the business around the consumer and categories and better leveraging of operating expenses while still investing in growth. Perez said they are now leveraging opportunities to share resources between brands and drive collaboration. He cited the recent move to roll the Exeter Brands Group under the Converse operating unit led by Jack Boys. Converse CFO Lisa Kempa is also functioning as president of Exeter, which is really the center of NKEs mass retail strategy, including the Starter Brand.
As for the fiscal second quarter through November, sales grew about 9% excluding the impact of foreign currency exchange rates. NKE said growth was slightly higher than expected thanks to “strong demand” in the U.S. and Latin America. Profit growth was driven by strength in the top-line and better SG&A leverage, offset by weaker gross margins. Lower footwear margins across the board and lower apparel margins in Asia were offset a bit by FX rate upside.
The difficulty with footwear margins may be a leading indicator for other footwear brands as higher oil prices trickle down into higher component costs in footwear. But Nike also took a margin hit from its decision to support more value-oriented price-points in Asia and Europe, while strong demand forced the company to air freight product and invest in additional production. A shift in product mix and stronger U.S. growth also contributed to the GM erosion.
On a regional basis, the Nike brand continued to see challenges in the EMEA business, which includes Europe, the Middle East and Africa. The region saw double-digit constant dollar revenue growth in emerging markets and Central Europe offset in part by continued challenges in Western Europe, primarily France and the U.K. Nike feels it has gained share in both footwear and apparel in Western Europe, but also said they started to experience some of the weaker trends their competitors have reported over recent quarters. The company said that the revenue and futures figures for the region reflect decisions made to walk away from some business that dont support brand strategy. Nike brand Co-President Charlie Denson said they pulled some premium performance products out of distribution in the U.K. and France that were not seen as “brand-enhancing.”
EMEA gross margins improved 40 basis points for the quarter, contributing about 10 bps to the total company gross margin change, as better FX rates, fewer closeout sales, and better margins on closeouts that were sold were offset by tighter margins in value product and increased product costs. The 1.7% decline in operating income in the quarter was due in large part to a mid-single-digit increase in SG&A expenses.
| Nike, Inc. Fiscal Second Quarter | ||||||
| Regional Operating Results | ||||||
| U.S. | EMEA | Asia/Pac | Americas | Other | Total | |
| Sales | $1,307 | $977 | $503.3 | $252.1 | $434.8 | $3,475 |
| Adj. Change* | n/c | n/c | 2.0% | 20.0% | n/a | +9.0% |
| Pre-Tax | $265.7 | $194.2 | $115.2 | $57.4 | $23.0 | $463.8 |
| Change | 14.0% | -1.7% | 2.9% | 29.6% | 10.6% | 15.1% |
| Backlog | 9.0% | -6.0% | 2.0% | 23.0% | n/a | 2.5% |
| Adj. Change* | n/c | 2.0% | 9.0% | 20.0% | n/a | 7.0% |
In Asia Pacific, both footwear and apparel saw revenue growth of roughly 2% on a constant currency basis. Equipment was up 9% currency-neutral.
China was the key driver here, while Japan, Korea, and Australia were all weaker. Japan was the biggest disappointment, as currency-neutral revenues declined in single-digits for the quarter. Nike said the footwear business has been affected by a “lack of excitement” in the market and “intense promotional activity” at lower price points. Apparel was also down. Nike said that new footwear product developed to strengthen their position at lower price-points will roll out next month. Futures are up on a constant dollar basis.
Asia Pacific gross margins fell 240 basis points in Q2, impacting overall company GM by 30 basis points, but operating income still rose on improving SG&A expenses.
The Americas saw stronger currencies deliver 13 percentage points of the regions growth in the fiscal second quarter, but currency-neutral sales growth still topped 20% on contributions from all countries in the region. Brazil and Argentina were the largest contributors. Gross margins were flat.
In the U.S., wholesale footwear unit sales grew 20% for Q2 on strength in both sport performance and sport culture businesses across all genders. The brand saw more rapid growth in the middle and lower price-points. Apparel revenues increased despite a decline in the licensed apparel business attributed to the expiration of the NBA license. The company said the last significant quarter for NBA sales was in the fiscal Q2 period last year, so they have easier comparisons going forward.
The Nike PRO business was up 80% for the year-to-date period and womens fitness was up 19%.
Management called out the Jordan brand for its contribution during the quarter, posting an increase of nearly 50% for the period. The company is estimating that Jordan is now the fifth-largest brand in the U.S. and is within striking distance of the number four spot in U.S. footwear.
Owned-retail saw a 15% in sales for the period, with Niketown stores posting a 5% comp store sales increase.
Gross margins in the U.S. fell 170 basis points in the quarter, impacting overall company GM by 70 basis points.
Futures for the period through April were up in both units and average selling price.
The Subsidiaries business grew faster than the Nike brand as a whole, with Converse posting an increase of nearly 40% for the period and Nike Golf showing revenue growth in the high-teens for the period. Bauer Nike Hockey posted the only operating loss for the quarter, due to its recent re-branding initiative.
NKE said operating income for the Subsidiaries grew 19% for the quarter when excluding the BNH business for both years.
NKE is expecting high-single-digit revenue growth for the full year, with growth in mid-singles for the balance of fiscal 2006, reflecting the current backlog picture and less favorable FX rates. The company sees stronger growth in Q3 versus Q4, while gross margins for the balance of the year are seen as weaker than last year, but still in line with the Q2 margins.
>>> The vision of an experienced CPG manager is starting to take shape here. Look for more talk in the future about regional (and country) share
| Nike, Inc. | |||
| Fiscal Second Quarter Results | |||
| (in $ millions) | 2005 | ||
