The strategy to reduce its exposure at Foot Locker caused U.S. fiscal Q3 footwear revenues to slip and U.S. footwear futures to be move lower, but Nike says sell-through of Nike footwear remains robust and long-term prospects look promising.
NKE said strong international sales powered flat Q3 profits that outpaced Wall Street’s projections and fueled a rise in worldwide futures for Back-to-School, but results were clearly skewed by the weak dollar.
The company reported earnings of $124.7 million, or 47 cents a share, for the quarter, a penny above the analyst estimates. The results were fairly flat against last year’s $126.3 million, or 46 cents a share.
U.S. revenues increased 3% to $1.13 billion, compared to $1.09 billion in the same period last year. U.S. athletic footwear revenues were down 1.0% to $761 million and apparel revenues grew 12% to $307 million. Equipment revenues increased 14% to $59 million.
Despite the indication of lower sales, Nike Brand Co-President Charlie Denson stated that, “nine of the top ten shoes (sold) in the U.S. are Nike.”
The brand is still the clear favorite in basketball, underscored by its overwhelming presence with college programs. NKE noted that 75% of teams in the Men’s and Women’s NCAA tournament are wearing Nike.
Nike also said its relationship with Foot Locker Inc. “remained unchanged.”
Denson reiterated that theyre not engaged in a “Foot Locker distribution strategy”, but rather a U.S. distribution strategy with Foot Locker a component of the overall plan, suggesting that Nike has been able to move to other customers most of the product that has been taken out of Foot Locker.
Dismissing the notion that the spat with Foot Locker was a “prizefight”, Denson said that Nike, as FLs biggest vendor, is committed to optimizing mutual interests with Nikes biggest account.
The dispute that has caused Foot Locker to look outward from the U.S. to grow its business is also reflected in the increased growth Nike sees in its European operations, with business there — which includes Africa and the Middle East-growing 8.0% to $646 million.
Benefiting from exchange rates, EMEA footwear revenues increased 7.0% to $363 million, apparel revenues grew 6.0% to $239 million and equipment increased 21% to $43 million. Revenues would have been down 7.0% on a currency-neutral basis.
In Asia, quarterly revenues in the Asia Pacific region grew 17% (+12% currency-neutral) to $335 million. On a country basis, Korea saw a 40% gain, China grew 20% for the quarter and 40% YTD and Japan increased 11%. Footwear in A-P were up 17% to $186 million, apparel grew 16% to $116 million and Equipment gained 24% to $33 million.
Other revenues, which include Nike Golf, Bauer NIKE Hockey Inc., Cole Haan, and Hurley International LLC, grew 10% to $185 million.
Total revenue rose 6.0% to $2.4 billion from $2.26 billion a year ago. Gross margins in the quarter were up 160 basis points to 40.7% compared to 39.1% Q3 LY.
Worldwide futures orders for athletic footwear and apparel scheduled for delivery through July totaled $4.2 billion, up 5.8% from the same period last year. Futures orders outside the U.S. are up 15%. Total futures would have increased 1.1% in constant dollars.
NKE did see the average price per pair drop due to a higher ratio of classic product in the mix, but management also noted that it was seeing a positive trend in the average price per pair of shoes in its future orders.
“As we look at the fall 03 back-to-school season, were definitely seeing that the average price decline is slowing considerably. In fact the price is up,” Nike Brand Co-President Mark Parker said.
At quarter end, global inventories totaled $1.5 billion, up 6.0%, or down 1.0% in constant dollars. U.S. inventories rose less than 1%.
Sales at factory outlets were up 11% on comp store basis. Denson said the rise reflected improvements in operational efficiencies of the stores rather than increased product flow.
In the conference call with analysts on Wednesday, CFO Donald Blair said the company “should be able to deliver on revenue and profit goals” for this fiscal year, citing the current uncertain economic and political environment.
Nike said its long-term goals target revenue growth in the high-single digits, with earnings per share up in the mid-teens on a percentage basis.
First Call analyst estimates see full-year EPS of $2.76, up from $2.46 the company earned in fiscal 2002.
NKE shares closed up 7.1% for the week to close at $53.30 on Friday.
>>> Management seems comfortable that the redistribution strategy is working. While cautious given the current US economy and world events, they remain committed to the strategy of moving away from Foot Locker and into other accounts…
>>> We should expect to see improving U.S. results over the next few quarters as the revised strategy takes hold…
