Nike Confirms Sales Through Amazon As Q4 Tops Expectations

Shares of Nike jumped $5.83, or 11.0 percent, to $59.00 on Friday after the company  reported fourth-quarter earnings that came in well above targets due to lower expenses and strength overseas and across its direct-to-consumer (DTC) businesses.

In North America, sales were flattish due to its exit from the golf equipment business, but core categories showed momentum, earnings improved modestly and inventories were down 6 percent at the quarter’s end.

But the big news in the media was Nike’s confirmation that it had launched a new “pilot” to sell directly on Amazon for the first time.

“As we do with all of our partners, we’re looking for ways to improve the Nike consumer experience on Amazon by elevating the way the brand is presented and increasing the quality of product storytelling,” said Mark Parker, chairman, president and CEO, on a conference call with analysts. “We’re in the early stages but we really look forward to evaluating the results of the pilot.”

Parker said Nike continually looks at improving segmenting and differentiating across all its channels and each partner “ultimately requires a specific approach.” Online, Nike has already been partnering with TMall and Zalando to differentiate approaches.

Elevating the experience on the Amazon platform will include the quality of product information as well as providing a simple experience for the consumer. Said Parker, “We’re really looking forward to seeing how this pilot combines, ultimately the convenience that Amazon is well known for with Nike’s brand and product power.”

Asked in the Q&A session whether the Jordan brand would be selling through Amazon, Trevor Edwards, president, Nike Brand, would only concur that it’s a “small pilot” with a “very tailored assortment for Amazon, so that we can actually learn as we go through this.”

Edwards also echoed Parker’s sentiments about the high priority on segmentation. He added, “We’ve always been very thoughtful around how we segment and differentiate with our partners, ensuring that they have the right assortment that allows them to best serve the consumers with the right products and we will continue to do that certainly with this Amazon partnership.”

Nike officials spent much more time on the call discussing its new realignment, called the Consumer Direct Offense, announced a few weeks ago that’s designed to align “product, design, categories in key cities all the way to the consumer.”

As part of the restructuring, Nike announced it will cut 2 percent of its global workforce and reduce the styles it offers by 25 percent. The brand will also intensify its focus on 12 key cities in 10 countries that represent over 80 percent to Nike’s projected growth through 2020. The program builds on its “Triple-Double” initiative that has a goal of goal of doubling investments on innovation, speed and direct connections with consumers.

Andy Campion, CFO, on the call, insisted the new restructuring was “not about cost cutting, but rather part of our more deliberate shift in focus and investment towards fueling growth through this new offense.”

In the quarter ended May 31, earnings improved 18.2 percent to $1.0 billion, or 60 cents a share, coming in well above Wall Street’s consensus estimate of 50 cents.

Revenues rose 5.3 percent to $8.7 billion and was ahead 7 percent on a currency-neutral basis.

Revenues for the Nike Brand were $8.1 billion, up 7 percent on a currency-neutral basis, driven by double-digit growth in Western Europe, Greater China, and the Emerging Markets, and strong growth in Sportswear and Running. DTC revenues for Nike Brand jumped 12 percent.

Revenues for Converse were $554 million, up 10 percent on a currency-neutral basis, primarily driven by the market transition in Italy and growth in DTC.

Gross margin declined 180 basis points to 44.1 percent as higher average selling prices were more than offset by unfavorable changes in foreign currency exchange rates and higher product costs.

Selling and administrative expense decreased 3.7 percent to $2.7 billion, and dropped as a percent of sales to 30.7 percent from 33.6 percent. Demand creation expense, or marketing, was $789 million, down 10 percent, due to significant year-ago investments around the Olympics and the European Football Championship. Operating overhead expense dipped 1 percent to $1.9 billion, as continued investments in DTC were offset by administrative cost efficiencies.

The bottom line was aided by net other income of $28 million, comprised primarily of net foreign currency exchange hedge gains. The effective tax rate was also slashed to 13.7 percent versus 21.2 percent for the same period last year, primarily due to an increase in the proportion of earnings from operations outside of the U.S., which are generally subject to a lower tax rate.

For the full year, sales rose 6.1 percent to $34.4 billion and grew 8 percent on a currency-neutral basis. Nike Brand revenues also grew 8 percent on a currency-neutral basis while Converse added 6 percent. DTC revenue for Nike Brand was up 18 percent driven by online growth of 30 percent, new stores and comp store growth of 7 percent.  Net earnings rose 12.7 percent to $4.24 million, or $2.51 a share.

NORTH AMERICA REGION BOLSTERED BY INVENTORY MANAGEMENT

By region, sales of Nike Brand in North America were up 0.5 percent in the quarter to $3.75 billion and grew 1 percent on a currency-neutral basis. On a currency-neutral basis, footwear grew 4 percent to $2.45 billion, apparel slid 2 percent to $1.14 billion and equipment tumbled 25 percent to $154 million.

The overall gains in North America in the quarter were led by strong growth in DTC. Operating earnings in North America gained 4.6 percent to $979 million, primarily fueled by gross margin expansion.

“In North America, momentum is building,” said Edwards on the call. The gains were led by Sportswear and Jordan, gross margin expansion, and improving inventory levels. The regional performance had been impacted by bloated inventories earlier in the fiscal year.

“For North America, we’ve made great progress in the supply chain managing inventory this year and today it’s clear we are well on the right path,” said Edwards. “At the same time, we still see a dynamic and promotional landscape. This is why we are aggressively executing our Consumer Direct Offense is so important.”

For the full year, revenues in the North America region grew 3.1 percent to $15.2 billion, and added 3 percent on a currency-neutral basis. Operating earnings expanded 3.0 percent to $3.88 billion.

Edwards said Nike has “tremendous anticipation” around its product launches for the current year. He added, “That pipeline and the excitement we know it will bring is why we feel so confident about our North America business.”

Futures orders in North America were down 10 percent although Campion said the company continues to see a “high single-digit disparity” between futures versus actual results and officials continue to downplay the futures metric.

Camion, nonetheless, said the North America retail landscape remains promotional and the company is executing in the region “with greater precision.” Strong inventory management bolstered margins last year and enabled the region to close the year with inventories down 6 percent.

For 2018 Camion said that while Nike is planning overall growth in North America for the full fiscal year, a “slight contraction” is expected in the first part of the year as the company plans to “more deliberately fuel growth in the direct dimensions of our business, while also more deliberately transforming or transitioning away from other less differentiated and less productive points of distribution.”

Camion added about the North America region, “Our key measures of success in fiscal year ‘18 will include stronger growth in the more direct dimensions of our business, both owned and partnered, healthy expanding margins for the geography overall and continued efficiency in the management of supply and demand.”

WESTERN EUROPE, GREATER CHINA, EMERGING MARKETS GENERATE DOUBLE-DIGIT GAINS

In other regions in the fourth quarter, sales in Western Europe improved 4.1 percent to $1.56 billion and jumped 12 percent on a currency-neutral basis. The gains were led by its Sportswear and Running categories, as well as its Young Athletes business.

Operating profits declined 7.5 percent to $285 million, reflecting the impact of transactional FX headwinds on gross margin.

“In Q4, we saw significant strength in DTC and digital,” said Edwards of the region. “Our largest accounts in Western Europe also showed strong growth highlighted by strong momentum with JD and Zalando. At the same time, we activated the Express Lane in Europe ensuring consumers are served with stronger, quicker response to the products they love.”

Apparel is outpacing footwear growth throughout Europe with Nike Sportswear in May marking the biggest month for any category in the history of its Western European business.

In Greater China, sales in the quarter for Nike Brand rose 11.0 percent to $1.09 billion and advanced 16 percent on a currency-neutral basis. Double-digit growth was seen in both footwear and apparel, DTC and wholesale in most categories. Operating earnings improved 6.4 percent to $380 million as strong revenue growth was slightly offset by lower gross margin, primarily due to transactional FX headwinds.

Nike officials noted that China is the geography where the Nike brand is most directly serving the consumer in the marketplace and both owned and partnered outlets are exceeding expectations.

“In Greater China, the brand is stronger than ever,” said Edwards. The brand is the number one sports brand on TMall and its digital commerce apps are resonating with consumers.

“Throughout Nike.com, TMall and WeChat, we saw strong product sell-through and significant consumer engagement,” said Edwards. “Through work like this, we keep our momentum in Greater China moving full speed ahead and we plan further acceleration as we expand the Express Lane to this geography. In fiscal year 2017, we saw real successes in our greatest growth opportunities. We also know there are areas where we can get better and with the Consumer Direct Offense, I know we will.”

In the Emerging Markets region, sales for Nike Brand jumped 20.8 percent to $1.05 billion and gained 18 percent on a currency-neutral basis. Double-digit growth was generated in most categories in nearly all territories. Operating earnings grew 12.6 percent to $215 million.

“In March, we saw an amazing execution of Air Max Day throughout the emerging markets,” said Edwards. “A series of city activations with more than 75,000 participants sparked extraordinary sales with 100 percent sell-through of the Air Max 1 and the Air VaporMax styles. This is yet another example of how our city teams localize global stories and bring them to life for their consumers.”

In Central & Eastern Europe, sales in the fourth quarter rose 3.5 percent to $357 million while increasing 6 percent on a currency-neutral basis. Operating income added 4.3 percent to $48 million. In Japan, revenues rose 5.4 percent to $295 million and gained 5 percent on a currency-neutral basis. Operating earnings jumped 40.0 percent to $77 million.

SPORTSWEAR, RUNNING, JORDAN PACE CATEGORY GAINS

By categories, Sportswear continues to see the strongest momentum with “another strong quarter of strong double-digit growth,” said Edwards. For the year, sales of Sportswear rose 14.3 percent to $8.6 billion and grew 17 percent on a currency neutral basis.

“We are seeing strong momentum in many iconic styles from the Cortez to the Presto, and the success of the Air VaporMax,” said Edwards. “As always, we are very excited about the innovations in the pipeline that will continue to bring performance to sports style.”

Edwards added that the reintroduction of the style guide on Nike.com is helping drive strong sell-through in products like its Beautiful Power collection in Women’s. Edwards added, “In fact, all told, our Women’s business, led by Sportswear, is showing tremendous growth, having outpaced Men’s over the full year.”

In Running, its second largest category, sales in the year rose 5.2 percent to $5.28 billion and gained 8 percent on a currency-neutral basis. Edwards said the category saw “very strong momentum” across its international markets.

On the field, Nike swept the podium at the Boston Marathon with five of the six runners wearing its new ZoomX technology. Its Breaking2 initiative, in which one of Nike’s runners just missed breaking the two-hour marathon, saw 20 million live-stream on Twitter and Facebook. Added Edwards, “Those are viewership numbers that rival the biggest events in sports. That attention created global awareness for the Zoom Vaporfly 4 percent, driving momentum across the entire Zoom platform, including the new Zoom Fly and the Pegasus 34.”

Jordan Brand’s revenues in the year jumped 12.6 percent to $3.1 billion and added 13.0 percent on a currency-neutral basis. Outside of North America, Jordan’s sales surged 25 percent. Edwards added, “Also, the new Air Jordan 31 Lows along with the several other popular styles drove energy and demand at premium price points.”

Basketball returned to growth in Q4 in large part due to Kyrie 3 remaining the number-one performance basketball shoe and Paul George 1 “becoming the hottest shoe in the market with incredible sell-through,” said Edwards. “Successes like these drove significant market share gains in the all-important $100 to $150 price point.”

For the year, Nike Basketball dropped 6.2 percent to $1.29 billion while giving back 5 percent on a currency-neutral basis. Strong double-digit growth was still seen in Greater China and Western Europe for the year.

The category is expected to gain a boost from Nike’s taking over of the NBA sponsorship this coming season from Adidas.

Among other categories, sales of Men’s Training in the year inched up 0.2 percent to $2.62 billion and grew 1 percent on a currency-neutral basis. The rest of the categories suffered declines in the year.

Football (Soccer) was down 7.3 percent to $1.99 billion and was off 4 percent on a currency-neutral basis. Women’s Training declined 5.9 percent to $1.27 billion and slid 4 percent on a currency-neutral basis. Action Sports slumped 9.0 percent to $596.7 million and lost 7 percent on a currency-neutral basis. Golf was down 18.0 percent to $579 million and also off 18 percent currency-neutral.

INCREASED FOCUS ON INNOVATION, SPEED AND CONNECTIONS

On the call, Parker elaborated on the progress the company is making in its Triple-Double initiative.

Around doubling innovation, he cited the success Nike is having with the launch of three cushioning platforms: Air VaporMax, “a product that hits the sweet spot of performance and style.;” ZoomX, which gained acclaim during Breaking2; and Nike React, which was showcased during the NBA Playoffs.

“With all three platforms, we’re just getting started,” said Parker. “Nike’s strength is our ability to get more out of each of our innovations by scaling across brands and across sports and what you’re seeing right now is just a snapshot.”

Nike is planning major launches with the first Flyknit apparel starting with the Flyknit bra, a “radically designed comfort cushioning platform,” HyperAdapt 2.0, as well as new technology to support its NBA uniform launch.

Around speed, the focus on 12 key cities also led to a simplified structure of four geographies: North America; Europe, Middle East and Africa; Greater China; and Asia Pacific and Latin America. While adding greater digital expertise and control in the markets, the key city approach is also designed to drive real-time response through its Express Lane initiative. Tapping real-time sell-through data, Express Lane helps restock best-sellers quickly, speed updates on existing best-sellers based on consumer insights and help cut the time from design to shelf in half. Said Parker, “As part of our key city approach, we’re cutting critical weeks out of the delivery time in the world’s most promising markets for sport.”

Finally, Parker sees the “most dramatic change quickly” with “2X Direct,” or its goal to double its connections with consumers. The direct initiative is being led by mobile and s represented by the successes of the popular SNKR Stash and Shock Drop apps. Relatedly, the company has also begun a new partnership with Instagram that will allow consumers to purchase Nike product in the Instagram app.

Said Edwards, “Clearly, we are boosting our ability to create new ways to serve consumers, making the entire NIKE+ ecosystem available to consumers where they already live. This is why we are so excited about the Consumer Direct Offense. It will take these elements and all these great concepts and scale them to make the most of our connections with consumers everywhere.”

FX HEADWINDS CLOUDS OUTLOOK AGAIN

For the current year, sales on a currency-neutral basis are expected to expand in the mid-to-high single-digit range. Growth is expected in all geographies, led by continued strong growth internationally.

Gross margin, excluding the impact of foreign exchange, is expected to expand beyond the high-end of its stated long-term goal of 30 basis points to 50 basis points per year. For SG&A, growth is expected in the mid single-digit range, leading to another year of double-digit currency-neutral EBIT expansion in fiscal 2018.

On a reported basis, FX is expected to present an approximately $700 million headwind in the current fiscal year. Reported revenue is projected to grow in the mid-single digits.

Gross margin is expected to decline as much as 50 basis points, with FX having a more pronounced impact on the first half of the fiscal year. SG&A is expected to grow in the mid single-digit range, inclusive of costs related to its recent leadership and organizational realignment. The majority of those costs are expected to land in the first half of the fiscal year, with savings being reinvested to fuel growth of its new Consumer Direct Offense efforts.

For the first quarter, reported revenue is expected to be flat with year-over-year comparisons and is being impacted by the Olympics, European Football Championship, foreign exchange and its exit from the golf equipment business in the prior year. Growth on a normalized basis is expected to be in line with its growth over the past two quarters. Gross margins are expected to contract between 150 basis points and 180 basis points driven by FX headwinds. SG&A is projected to grow in the mid single-digit range.

Campion added, “Looking out to fiscal year ‘19 and beyond, at current rates, we expect the negative impacts of foreign exchange to be behind us, positioning us to continue delivering strong growth and expanding profitability on a currency neutral operating basis, as well as on a reported basis.”

Photo courtesy Nike