By Thomas J. Ryan
<span style="color: #999999;">Powered by outsized growth in China and across digital channels as well as gross margin expansion, Nike Inc. earnings in the first quarter climbed 25.2 percent to easily eclipse Wall Street’s targets. Nike officials also provided an upbeat outlook for its fiscal year.
In the quarter ended August 31, earnings reached $1.37 billion, or 86 cents per share, driven primarily by strong revenue growth and gross margin expansion. Wall Street’s consensus estimate had been 71 cents.
Revenue increased to $10.7 billion in the first quarter, up 7 percent on a reported basis and 10 percent on a currency-neutral basis. Wall Street’s consensus estimate had been $10.43 billion.
The gains were driven by growth across all geographies.
Nike Brand revenues grew 7.2 percent on a reported basis to $10.1 billion and 10 percent on a currency-neutral basis. EBIT (earnings before interest & taxes) for Nike Brand advanced 17.5 percent to $1.86 billion.
By region, North America revenues for Nike Brand were up 3.6 percent to $4.29 billion while expanding 4 percent on a currency-neutral basis. EBIT inched up 2.1 percent to $1.1 billion.
Nike’s growth in North America slowed from a currency-neutral gain of 8 percent in the company’s fourth-quarter but Andy Campion, EVP and CFO, on a conference call with analysts described the region’s growth performance as “right on plan.” The gains were led by digital from a channel perspective and Sportswear and Jordan categorically in shift first detailing in October 2017.
Added Campion, “We are reshaping the marketplace in North America with Nike Digital growing over 30 percent on a currency-neutral basis and with high single-digit growth across our key strategic and differentiated partners.”
The more-modest growth also reflects an intentional decline in undifferentiated multi-brand wholesale accounts. At the time, Nike officials said around 40 percent of the brand’s products are currently in what it terms “differentiated” spaces, and the goal was to double that proportion to 80 percent by 2022.
Said Campion, “We continue to reallocate our best product and our retail investment to Nike Direct and differentiated partner experiences. That includes, for example, testing new services leveraging the Nike App in partner doors such as in Washington Heights with Foot Locker.”
In the EMEA (Europe, Middle East & Africa) region, sales for Nike Brand reached $2.77 billion, up 6.4 percent on a reported basis and 12 percent on a currency-neutral basis. EBIT climbed 21.6 percent to $609 million.
Growth in the EMEA region was broad-based across categories and amplified by strong double-digit growth in digital. Campion said Nike sees “continued strong digital momentum in Europe,” with the Nike App just launched in 13 new European countries. Said Campion, “We extended our lead in Europe in Q1, with the Nike Brand rated the #1 favorite Brand in all of our key cities, and our business is growing at strong double-digit rates in London, Berlin and Milan. While Nike Direct is a key driver, our strategic partnerships with JD and Zalando are also contributing to our strong, sustained growth.”
In Greater China, Nike Brand sales climbed 21.8 percent to $1.68 billion and advanced 27 percent on a currency-neutral basis. EBIT expanded 33.3 percent to $669 million.
China’s performance marked the region’s 21st consecutive quarter of double-digit revenue growth. The gains were fueled by nearly all key categories, led by Sportswear and Jordan. Said Campion, “Coming off of the FIBA World Cup in China, we are also excited about the energy around Basketball in this geography, and globally, as we enter the new NBA season.”
Digital grew over 70 percent in Q1 in China, in part amplified by strategic partnerships with Tmall and WeChat. Looking ahead, Nike will be pulling forward the launch of the Nike App in China into late Q2.
Said Campion, “Based on trade and other dynamics, we continue to be deeply engaged with our all of constituents in China, and we are closely monitoring consumer sentiment. At the same time, an affinity for the Nike Brand continues to build and our sell-through at retail remains very strong. We believe we are extending the Nike Brand’s leadership in China by remaining authentically focused on serving the Chinese consumer while fueling their passion for sport and a broader movement toward a more active lifestyle.“
APLA (Asia Pacific & Latin America) revenues for Nike Brand grew 5.9 percent to $1.35 billion and climbed 13 percent currency-neutral. EBIT rose 5.6 percent to $341 million.
The APLA gains were driven by nearly 50 percent growth in Nike Digital. In Q1, Nike launched the Nike App at retail in its Harajuku store in Tokyo. Added Campion, “The culture of basketball was also a driving force behind the momentum we saw in APLA, with the Jordan Brand growing strong double digits year-over-year.”
Describing APLA as “very entrepreneurial and diverse geography,” Campion said Nike continued to test new concepts with local partners such as its digital commerce relationship with Flipkart in India, to leveraging the social media platform and Kakao in Korea on the launch of Joyride.
Converse’swere revenues were up 5.3 percent on a reported basis to $555 million and added 8 percent on a currency-neutral basis. EBIT jumped 40.8 percent to $138 million. Converse delivered strong double-digit growth in China and across Digital globally while returning to growth in Europe. These gains were offset by declines in the U.S.
“Growth is being fueled by an increasingly stronger and diversified product portfolio including the Chuck Taylor franchise, Chuck 70, and the Chuck Taylor Lift,” said Campion. “We’re also excited about Converse’s re-entry into performance basketball, which got off to a great start with the successful launch of the All-Star Pro BB.”
The earnings gains were boosted by gross margins increasing 150 basis points to 45.7 percent. Margins significantly exceeded guidance calling for margins to be flat to up 25 basis points. The improvement was due primarily to a shift in the timing of supply chain and other investments out of Q1 and into the balance of the year, as well as significantly lower than planned markdown rates in its Nike Factory Stores. Margins also benefited from a favorable mix impact from stronger than planned growth in its high-margin international geographies. These positives were offset by impacts from changes in foreign currency exchange rates and higher product costs.
Selling and administrative expense increased 9 percent to $3.3 billion due to continued investments in its digital transformation and, in part, driven by brand marketing associated with the Women’s World Cup and the Joyride launch.
Demand creation expense was $1.0 billion, up 6 percent, primarily driven by higher advertising expenses and sports marketing investments. Operating overhead expense increased 10 percent to $2.3 billion driven by continued investments in transformational capabilities, particularly in Nike Direct and global operations.
As of August 31, inventories were up 12 percent, reflecting strong forward-looking consumer demand globally, and in support of key consumer moments such as back-to-school, which extended into September this year and looking ahead to Singles Day on 11.11 in Greater China.
<span style="color: #999999;">Looking ahead, Campion said Nike’s projected currency-neutral growth and profitability are improving.
Reported revenue growth is expected to continue to increase within the high single-digit range, slightly exceeding FY19 reported revenue growth. The recently implemented tariffs and the “more intense FX headwinds of late associated with trade dynamics” are expected to be offset by an improving outlook for currency-neutral growth.
Gross margins are now expected to expand within the 50-to-75 basis point range, versus previous guidance calling for margin improvement of 50 basis points. The margin guidance assumes that the negative impact of recently implemented tariffs remains in effect for the balance of Nike’s fiscal year.
SG&A is still expected to grow roughly in-line with revenue for the full-year, although the recent acquisition of Celect is expected to have some impact on SG&A.
For the second quarter, revenue growth is expected to be in line with Q1 reported revenue growth. That assumes strong, currency-neutral revenue growth that will offset roughly three points of FX headwinds.
Gross margin is expected to expand about 25 basis points with the slightly greater expansion than that in the second half of the year. The impact of tariffs will be most pronounced in Q2. SG&A growth in Q2 is expected to expand in the high single-digit range.
“We are extremely pleased with our Brand momentum and the strong currency-neutral growth we’ve delivered since implementing our new offense two years ago. That said, we are still in the early stages of Nike’s strategic transformation,” said Campion. “Our execution of the Consumer Direct Offense will continue to fuel growth across our portfolio of key categories, key cities and key countries as well as accelerate our growth against the outsized long-term opportunities we see in Women’s, Apparel, Digital, and International.”
Photo courtesy Nike
