Nike’s Futures Orders Drop, But In A DTC World, Does It Matter?

By Thomas J. Ryan

Nike Inc.’s earnings for the first quarter ended August 31 easily topped Wall Street’s targets, marked by a bounce-back in sales in the North American market and double-digit gains in most other regions. But a slower growth rate in futures orders cast some doubt on Nike’s growth prospects over the next few quarters.

Globally, futures for Nike Brand – representing goods for delivery between September 2016 through January 2017 – rose 5 percent compared with 9 percent growth for the same period a year ago. On a currency-neutral basis, futures were up 7 percent versus 17 percent at the same time a year ago. In North America, its largest region, futures were up just 1 percent compared with 14 percent growth at the same time last year.

Andy Campion, Nike CFO, said on a conference call with analysts that North American sales should outpace futures orders growth in the region for the balance of the year due to expected stronger sell-through to consumers. Regardless, Nike maintained its growth targets for the year, and Campion again stressed that futures orders aren’t as indicative of Nike’s sales growth as in the past due to the company’s “evolving business mix,” which includes more at-once orders. Futures orders also exclude goods headed to factory outlet stores, which have become a much bigger part of the mix over the years.

In a major shift due to those changes, Campion stated the company will no longer report futures orders in its quarterly earnings news releases. They will instead be discussed on its analyst conference calls and reported in regulatory filings.

“Futures orders continue to be an important and valuable aspect of our operating model. That said, the relationship between reported futures and reported revenue in a given quarter has become less correlated,” said Campion.

Still, the sluggish order figures reinforced concerns over Under Armour grabbing share in Nike’s dominant basketball category with its hot Stephen Curry launches, as well as Adidas’ comeback that’s being helped by a trend shift toward casual athletic models.

Alluding to the broad athleisure trend, Mark Parker, Nike’s CEO, also acknowledged that ”new brands are entering into the athletic landscape” as the “look of sport continues to influence everyday style around the world.”

Parker noted that activewear apparel and shoes are outperforming their broader categories, making it a “great time to be in the business of sports.” He further pointed to the benefits of being a leader in the space. Said Parker, “We are on the front end of all this growth, a driving force behind the expanding market. We not only see the upside across the landscape, we have both the scale and the skill to act on it.”

In the first quarter, revenues jumped 7.7 percent to $9.1 billion and were up 10 percent on a currency-neutral basis. Net profit increased 5.9 percent to $1.25 billion, or 73 cents per share, easily ahead of Wall Street’s consensus estimate of 56 cents.

Earnings were boosted by a surprise tax benefit. The effective tax rate in the latest quarter was 2.5 percent, compared to 18.4 percent for the same period last year, primarily due to a one-time benefit related to the resolution with the U.S. Internal Revenue Service of a foreign tax credit matter.

Excluding the benefit, earnings were down 11 percent due largely to marketing investments including the Rio Olympics and a contraction in margins.

Globally, Nike Brand revenues grew 7.1 percent to $8.5 billion while climbing 10 percent on a currency-neutral basis. Footwear revenue for Nike Brand was up 6.8 percent to $5.5 billion and ahead 10 percent on a currency-neutral basis. Apparel grew 8.9 percent to $2.5 billion, or 12 percent currency-neutral. Equipment added 3.7 percent to $423 million, or 6 percent currency-neutral. EBITDA for Nike Brand decreased 20.1 percent to $1.3 billion.

Direct-to-consumer (DTC) revenue for Nike Brand remained strong, up 22 percent in the quarter. Nike.com led the way at 49 percent growth. The overall gains were driven by double-digit growth in all international geographies and double-digit gains in Sportswear, Running and Jordan Brand. Its Men’s, Women’s and Young Athletes’ businesses all grew double digits. Nike Brand also saw an uptick in its Basketball business.

“We’re excited about the pipeline of great products that we have coming,” said Trevor Edwards, president, Nike Brand. “The brand is as strong as ever.”

North America Region Returns To Growth
In the North America region, sales for Nike Brand grew 6.1 percent to $4.03 billion and expanded 6 percent on a currency-neutral basis. The performance marked a rebound from flat sales reported in the fourth quarter amid inventory-clearance initiatives.

Among categories, the gains in North America were led by footwear, ahead 6.4 percent to $2.52 billion and up 7 percent on a currency-neutral basis. Apparel’s revenues grew 5.6 percent to $1.32 billion and 6 percent on a currency-neutral basis. Equipment sales were up 5 percent to $196 million and added 5.4 percent on a currency-neutral basis.

Growth in the region was driven by Sportswear and Jordan, as well as gains in Running. Edwards said the North American gains were boosted by record awareness and engagement around the Olympics and its Unlimited advertisement campaign. In Basketball, which has recently been hurt by weakness in its signature models, the category returned “to a pull market” due to strong demand for recently introduced styles.

Added Edwards, ”We also made great progress against clearing excess inventory within the quarter and we’re seeing the benefit of bringing new product into the clean, full price, in-line channels.”

EBITDA in the North America region was down 3.6 percent to $1 billion, as revenue growth and full-price gross margin expansion were offset by higher marketing expenses related to the Olympics and a higher mix of off-price liquidation in Q1 versus the same period in the prior year.

The 1-percent gain in futures at the close of the period partly reflected effort to keep inventories “tight to maintain a pull market,” according to Campion, following its challenges balancing supply and demand earlier in the year.

“We will continue to manage the flow of product into the market as we expand on an already healthy in-line marketplace,” said Edwards. He also said the company still sees “tremendous opportunity” for Nike Brand in the region while calling out the same “tremendous opportunity” in women’s and youth across both performance and sportswear areas.

In Western Europe, revenues for Nike Brand in the quarter advanced 7.4 percent to $1.76 billion and expanded 10 percent on a currency-neutral basis. Growth was primarily driven by Sportswear, Global Football, Running and Jordan. Western Europe marked its 12th consecutive quarter of double-digit currency-neutral growth, and the performance was fueled by the European Championships and the kickoff to the global football season.

Nike’s DTC business continues to perform well in the region, growing 30 percent in the quarter. Gains were also seen with its wholesale partners, partly due to investments in in-store merchandising at key accounts, including Intersport in Paris and House of Hoops on London’s Oxford Street with Foot Locker.

EBITDA in Western Europe was down 19.2 percent to $392 million, reflecting the impact of foreign exchange (FX) headwinds on gross margin and marketing investments around the European Football Championships and Olympics.

Western Europe futures were up 4 percent on a reported basis and 9 percent on a currency-neutral basis. Said Edwards, “We are rated by consumers as the favorite brand in all key cities in Western Europe, and momentum we have seen in Q1 reinforces our view that we have tremendous growth potential in this important geography.”

Greater China’s sales for Nike Brand jumped 16 percent to $1.02 billion and added 21 percent on a currency-neutral basis. Growth was in the double digits in both footwear and apparel, in both DTC and at wholesale and across nearly every category. EBITDA in Greater China was ahead 12.4 percent to $371 million. Futures are running ahead 15 percent on a reported basis and 19 percent on a currency-neutral basis.

Edwards said the region was helped by enthusiasm around the Olympics as well as athlete visits by LeBron James, Kevin Durant and Russell Westbrook this summer. He added, “This energy is reflected in our category results with tremendous momentum across Running, Sportswear, Jordan and Nike Basketball.”

Nike.com is generating “incredible growth” in China with a focus on mobile. Wholesale growth continues to be helped by investments in re-profiling locations. Said Edwards, “We will continue to raise the bar as we scale the number of re-profiled doors in the fleet. We feel great about the progress of our business in China and, more importantly, we are more confident than ever in our ability to drive sustained growth in this geography.”

In the Emerging Markets regions, sales for Nike Brand advanced 11 percent on a currency-neutral basis due to excitement around the Rio Olympic Games. Growth was driven by strong momentum across Sportswear, Running and Jordan. Southern Cone (SOCO) and Pacific saw the highest growth rates. Due to currency headwinds, however, sales on a reported basis were down 2.2 percent to $945 million. EBTIDA likewise slumped 33.7 percent to $171 million due to the FX headwinds. Futures were up 6 percent and 10 percent on a currency-neutral basis.

In other smaller regions, Central and Eastern Europe’s sales for Nike Brand rose 9.7 percent to $440 million and increased 16 percent on a currency-neutral basis. EBITDA was down 17.3 percent to $81 million. Futures were up 9 percent on both a reported and currency-neutral basis.

Sales in Japan jumped 36.9 percent to $245 million and gained 18 percent on a currency-neutral basis. EBITDA leapt 38.9 percent to $50 million. Futures were up 26 percent on a reported and 11 percent on a currency-neutral basis.

Converse’s revenues increased 3.4 percent to $574 million and were up 4 percent on a currency-neutral basis. Growth in North America was slightly offset by declines in Europe and Asia Pacific. EBITDA for Converse was down 33.7 percent to $171 million.

Running, Basketball And Sportswear Drive Category Gains
Elaborating on the category performance for Nike Brand, Edwards noted that Running grew double digits in the quarter, with strong growth across footwear and apparel. Footwear hits included the LunarEpic Low and Air Zoom Pegasus 33 as well as Free styles. Nike Brand also partnered with Apple on the Apple Watch Nike+ that integrates Nike+ Run Club motivational tools. Said Edwards, “I can’t wait for runners everywhere to start using it.”

Nike Basketball saw a “great response” to the KD 9, which came in at price of $150 versus $180 for the KD 8. The signature Kyrie 2 “continues to be met with strong consumer response,” while the LeBron Soldier 10 is seeing “very strong sell-through” in the U.S. and China. Added Edwards, “The products are strong, the pipeline is loaded and I can’t wait for the NBA season to start so we can deliver these amazing innovations to our consumers.”

Jordan Brand continues to see double-digit revenue growth and “is more popular than ever,” said Edwards. Its entrance into the men’s training category with the Jordan Trainer 1 has met “strong excitement in the marketplace,” while the Air Jordan 31 in Basketball saw a strong launch. The Jordan 1 Retro High with the original band red and black colorway sold out within an hour.

Sportswear, the company’s lifestyle segment, saw its 11th consecutive quarter of double-digit growth, aided by continued gains on the footwear side with the Huarache, the Tanjun and the Air Force 1, along with running models recently enhanced with Flyknit, such as the Roshe 2 and the Air Max 1. In apparel in the Sportswear segment, momentum was driven by an improved Tech Fleece and the Dynamic Reveal jacket worn by all U.S. Olympic medal winners on the medal stand.

The bottom line was impacted by erosion in gross margin by 200 basis points to 45.5 percent, as higher average selling prices were more than offset by several “temporary or discrete items,” including foreign exchange, a shift of expenses from operating overhead to cost of goods sold, a higher off-price mix and the impact of exiting the golf equipment business.

Also weighing on earnings was an increase in SG&A expenses to 32 percent of sales from 30.6 percent in the same period a year ago. The increase mainly reflected investments in key sports events, including the Rio Olympics. It also reflected continued growth in the DTC business, and targeted investments in operational infrastructure and consumer-focused digital capabilities. Income before taxes was down 11.3 percent to $1.28 billion.

Outlook Maintained For Fiscal Year 
Looking ahead, Nike’s guidance remained largely unchanged. Revenues are still expected to increase in the high-single-digit range and expand high single to low double digits on a currency-neutral basis.

For the second quarter, sales are expected to grow in the mid-single-digit range, slightly below Nike’s rate of reported futures growth, reflecting FX headwinds.

Gross margins are now expected to contract in the full year versus prior guidance calling for expansion by 30 to 50 basis points due to the continuation of many of the factors impacting Q1 margins. For Q2, gross margin are expected to contract by approximately 125 basis points, with the rate in the second half of the fiscal year approaching flat versus the prior year.

Nike now expects full-year growth in SG&A in the mid to high single digits, with Q2 growing in the low- to mid-single-digit range. The company had expected SG&A to increase in the high-single-digit range. Campion said the company’s “Edit to Amplify” investments are leading to productivity gains.

Photo courtesy Nike