Nike’s Earnings Slide In Fourth Quarter

Nike Inc. reported earnings fell 13.0 percent in the fourth quarter ended May 3 as increased marketing costs, currency headwinds and a higher tax rate offset improving sales and gross margins. Earnings were 4 cents below Wall Street’s average estimate.

Fourth-quarter revenue increased to $10.2 billion, up 4,0 percent on a reported basis and up 10 percent on a currency-neutral basis. Full-year revenue rose to $39.1 billion, up 7 percent on a reported basis and up 11 percent on a currency-neutral basis, as strategic investments in innovation and digital drove global consumer demand led by Nike Direct in both periods.

“FY19 was a pivotal year for Nike as we continue to bring our Consumer Direct Offense to life throughout the marketplace,” said Mark Parker, chairman, president and CEO, Nike Inc. “Our distinctive innovation and digital advantage led to accelerated growth across our complete portfolio, while our Brand fueled deeper relationships with consumers around the globe.”

Diluted earnings per share in the fourth quarter was 62 cents a share, driven by revenue growth, strong gross margin expansion,  and a lower average share count, partially offset by higher selling and administrative expense and a higher tax rate. Diluted earnings per share for the full year was $2.49.

“Reflecting on our FY19 performance, it is clear that growth is paramount at Nike, and that our strong growth is being driven by strategic transformation,” said Andy Campion, executive vice president and CFO, Nike Inc. “Amid foreign exchange volatility, our double-digit currency-neutral revenue growth and expanding ROIC showcase Nike’s unrivaled ability to create extraordinary
value for consumers and shareholders over the long term.”

Fourth Quarter Income Statement Review

• Revenues for Nike, Inc. increased 4 percent to $10.2 billion, up 10 percent on a currency-neutral basis.
• Revenues for the Nike Brand were $9.7 billion, up 10 percent on a currency-neutral basis,
  driven by growth across Nike Direct and wholesale, key categories including Sportswear,
  Jordan and Basketball, and continued growth across footwear and apparel.
• Revenues for Converse were $491 million, flat to the prior year on a currency-neutral basis,
  mainly driven by double-digit growth in Asia and digital which was offset by declines in the
  U.S. and Europe.
• Gross margin increased 80 basis points to 45.5 percent due primarily to higher average
  selling prices, impacts from foreign currency, and growth in Nike Direct. These benefits were
  partially offset by higher product costs and supply chain investments.
• Selling and administrative expense increased 9 percent to $3.4 billion. Demand creation
  expense was $1.0 billion, up 3 percent to the prior year due to global brand campaigns and key
  sports moments. Operating overhead expense increased 12 percent to $2.4 billion driven
  primarily by wage-related and administrative expenses, which reflect critical investments in
  innovation, data and analytics, and new capabilities to accelerate our end-to-end digital
  transformation.
• Earnings before taxes reached $1.24 billion, up 2.3 percent.
• The effective tax rate was 20.4 percent, compared to 6.4 percent for the same period last
  year, due to several discrete impacts within the prior period, including adjustments to the
  provisional charges related to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”).
• Net income was $989 million and diluted earnings per share were 62 cents, driven by strong
  revenue growth, gross margin expansion, and a lower average share count, which were slightly
  offset by higher selling and administrative expense and a higher tax rate. Year-ago earnings were
  $1,14 billion, or 69 cents a share.

By region, North America’s sales for Nike Brand rose 7.5 percent to $4.17 billion and advanced 8 percent on he currency-neutral basis. EBIT (earnings before interest and taxes) rose 7.5 percent to $1.05 billion.

In Europe, Middle East & Africa (EMEA) regions, sales for Nike Brand inched up 0.4 percent to $2.46 billion and were up 9 percent on a currency-neutral basis. EBIT reached $506 million, up 32.5 percent.

Greater China revenues for Nike Brand rose 15.6 percent to $1.7 billion and jumped 22 percent on a currency-neutral basis. EBIT reached $674 million, up 25.0 percent.

In the Asia Pacific & Latin America region, sales for Nike Brand were down 4.0 percent to $1.38 billion but rose 9 percent on a currency-neutral basis. EBIT was flat at $340 million.

Converse’s revenues reached $491 million, up 4.1 percent on a reported basis and flat on a currency-neutral basis. EBIT growth was 21.6 percent to $82 million.

Fiscal 2019 Income Statement Review

• Revenues for Nike, Inc. rose 7 percent to $39.1 billion, up 11 percent on a currency-neutral
  basis.
• Revenues for the Nike Brand were $37.2 billion, up 11 percent on a currency-neutral basis
  driven by growth across Nike Direct and wholesale, key categories including Sportswear, Jordan and Running, and double-digit growth across footwear and apparel.
• Nike Direct revenues were $11.8 billion, up 16 percent on a currency-neutral basis, driven
  by a 35 percent increase in digital commerce sales, 6 percent growth in comparable store
  sales as well as the addition of new stores. Sales to wholesale customers increased by 10 percent.
• Revenues for Converse were $1.9 billion, up 3 percent on a currency-neutral basis, mainly
  driven by double-digit growth in Asia and digital which was partially offset by declines in the
  U.S. and Europe.
• Gross margin increased 90 basis points to 44.7 percent due primarily to higher average
  selling prices, impacts from foreign currency, and growth in Nike Direct. These benefits were
  partially offset by higher product costs.
• Selling and administrative expense increased 10 percent to $12.7 billion. Demand creation
  expense was $3.8 billion, up 5 percent to the prior year due to sports marketing investments,
  global brand campaigns, key sports moments and new product launches. Operating overhead
  expense increased 13 percent to $8.9 billion driven primarily by wage-related and
  administrative expenses, which reflect critical investments in innovation, data and analytics,
  and new capabilities to accelerate our end-to-end digital transformation.
• The effective tax rate was 16.1 percent, compared to 55.3 percent for the same period last
  year, due to significant charges related to the enactment of the Tax Act in the prior year.
• Net income increased to $4.0 billion and diluted earnings per share was $2.49 driven by
  strong revenue growth, gross margin expansion, a lower average share count and a lower tax
  rate, which was partially offset by higher selling and administrative expense.

May 31, 2019 Balance Sheet Review

• Inventories for Nike, Inc. were $5.6 billion, up 7 percent compared to the prior year period,
  with healthy inventory levels across all geographies.
• Cash and equivalents and short-term investments were $4.7 billion, $582 million lower than
  last year as share repurchases, dividends, and investments in infrastructure more than offset
  proceeds from net income.

Share Repurchases

• During the fourth quarter, Nike, Inc. repurchased 10.6 million shares for approximately $897
  million as part of the four-year, $15 billion program approved by the Board of Directors in June
  2018. As of May 31, 2019, a total of 11.6 million had been repurchased under this program for
  approximately $986 million.
• In fiscal 2019, Nike, Inc. repurchased a total of 54.3 million shares for approximately $4.3 billion
  under the above mentioned $15 billion program currently in use as well as the previous $12 billion
  program approved by the Board of Directors in November 2015.

Full results are here.

Photo courtesy Nike