Aided by a strong response to new launches such as Nike React and Airmax 270, continued momentum in online sales and early success in pushing for further differentiation at its retail partners, Nike Inc. said its North America business is poised to return to growth mode.
Sales in the quarter in the region in the third quarter ended February 28 for Nike Brand were down 5.6 percent to $3.57 billion, continuing to reflect efforts to clean up inventories for Nike Brand as well as Jordan Brand.
The decline was driven by Footwear, off 7.9 percent to $2.29 billion. Apparel was flat at $1.15 billion. Equipment sales were reduced to $125 million from $138 million.
But Nike North America revenue is now projected to be roughly flat in Q4 and return to growth in the first half of fiscal year 2019.
On a conference call with analysts, Mark Parker, chairman, president and CEO, Nike Inc., said the the end of the third quarter “marks a significant turn in North America where we expect a reversal of trend in Q4. We’ve secured some great early wins here through new Nike consumer experiences and differentiated retail across both our direct and partner channels.”
Andy Campion, CFO, echoed those sentiments. “We’re fueling demand through the launch of innovative products. We have reignited brand heat. We’re connecting more directly with consumers through our digital ecosystem and orders from our strategic partners are building. In short, Nike has returned to a pull market in North America.”
Campion called out Nike.com as particularly strong in North America, accelerating to strong double-digit growth as the quarter progressed. But he likewise credited efforts by its wholesale partners to create differentiated shopping experiences.
“As an example, Finish Line’s Culver City store in L.A. was reset with Nike Epic React as the only product available in the store across all brands for three days,” said Campion. “The execution brought together new innovative Nike product with great storytelling through our shoes-go campaign and expert service. The results were amazing and served as a proof point for the potential of Nike consumer experiences operated by a strategic partner in the U.S. marketplace.”
Part of the decline in the quarter reflected a planned tightening of distribution of select styles within the Jordan brand. Campion said Jordan inventories are now clean in North America and launches and activations over the NBA All-Star weekend “began reigniting Jordan brand heat in the marketplace.”
Campion added, “Looking ahead, we are well-positioned to continue adding dimension to the Jordan brand through both performance and lifestyle product.”
EBIT for the North American region was down 14.3 percent in the quarter to $840 million, primarily driven by lower revenues and a higher selling and administrative expenses.
Companywide, Nike reported a loss of $921 million, or 57 cents a share, in the quarter after a charge of $1.25 share to reflect significantly higher income tax expense from the enactment of the Tax Cuts and Jobs Act.
Excluding the charge, earnings would have been 68 cents a share, well above Wall Street’s consensus estimate of 53 cents. Earnings were flat versus 2017 Q3 earnings of $1.14 billion, or 68 cents.
Revenues increased 6.5 percent to $9.0 billion while expanding 3 percent on a currency-neutral basis. Wall Street’s consensus estimate had been $8.85 billion. The overall growth was driven by Greater China, EMEA and APLA, including double-digit growth in Nike Direct and strong growth in sportswear and Nike basketball.
Other highlights in the quarter:
- Gross margin declined 70 basis points to 43.8 percent, due primarily to unfavorable changes in foreign currency exchange rates, which were partially offset by lower product costs.
- Selling and administrative expense increased 11 percent to $2.8 billion. Demand creation expense was $862 million, up 15 percent, primarily driven by higher spend in sports marketing, brand moments and new innovation launches.
- Operating overhead expense increased 9 percent to $1.9 billion, largely due to higher administrative costs and continued investments in global digital capabilities and the NikePlus membership program.
- Income before income taxes decreased 12 percent to $1.2 billion as solid revenue growth was more than offset by lower gross margin, higher selling and administrative expense and lower other income.
Campion said both revenue and gross margin exceeded internal expectations due to an “unprecedented flow of new products and innovation platforms that will scale over time.”
He said the results “make it clear that the Consumer Direct Offense is already igniting Nike’s next horizon of strong profitable growth.”
First announced in June 2017, the Consumer Direct Offense is designed to accelerate product innovation, move closer to the consumer through a Key Cities initiative and to deepen the company’s one-to-one connections with customers. The strategy is fueled by Nike’s Triple Double strategy: 2X Innovation, 2X Speed and 2X Direct connections with consumers, and Parker spent much of the time discussing progress in those areas.
On 2X Innovation, Parker noted that Air Vapormax became the number-one performance shoe above the $100 price point and the platform is now being scaled to new designs like Vapormax 2.0, Vapormax 97 and Vapormax Utility.
Nike React “set new records for performance innovation launch” with an initial offering to Nike+ members exclusively selling out within hours and several weeks’ supply selling out in four days. The Odyssey React, a running shoe at $120 price point, arrives in the current quarter with further expansion of the platform set for sportswear, basketball and Jordan icon styles.
Also called out was the Airmax 270 on the lifestyle side, and the Nike Air business overall is now expected to expand by “several billion dollars over the next few years.”
Other coming footwear innovations include a new digital-knitting process for Flyknit that wraps the foot to give the player better control over their movement. The technology will be featured on the Mercurial boot ahead of World Cup. Parker also said Eliud Kipchoge, who worked on the ZoomX 4%, is also working with Nike’s design team on new platform based on digital design that will be arriving in the fourth quarter.
In apparel, Nike Brand’s Vapor Knit technology featuring engineered yarns and open textures for breathability will get heavy play during the World Cup.
2X Direct’s success was most directly marked by the 18 percent gain in digital business on a currency-neutral basis in Q3. The gains were driven by the expansion of its digital apps in international markets, as well as the launch of Nike+ membership in North America.
Nike+ members grew more than 50 percent in the third quarter, with plans to launch in all of its key cities within the next fiscal year. The launch of its SNKRS apps in China in December drove two million downloads in the first month.
At retail, a new concept, Nike App, is being introduced in The Grove in Los Angeles as well as in Portland, OR, that recognizes customers as soon as they reach the store to offer exclusive products in their proximity. Said Parker, “You can scan for product availability in all nearby Nike doors or checkout and pay through the app with no waiting line. And if you are not in the store you can reserve product through the app and [it] will hold it in a personal locker so you can try it on before buying. There are a number of other features that will be phased in as we test [and] initiate before scaling to a wider fleet of stores.”
Parker also announced that Nike had acquired the New York-based consumer data and analytics firm, Zodiac, to further deepen connections with Nike+ members.
2x Speed will also look to further invest in data analysis to better anticipate consumers’ needs and offer more personalized offerings. A major focus remains Express Lane, an initiative with a goal to reduce lead times to less than six months, product updates to less than 90 days and product fulfillment to two days.
“We’ve made good product progress with our Express Lane teams, especially in EMEA where Express Lane product is accelerating growth in our power franchise,” said Parker. “In North America we are increasing our speed of delivery, particularly around key cities.”
Investments in Differentiated Retail Experiences Already Paying Off
Campion heralded Nike’s direct-to-consumer (DTC) growth, noting that wherever “the Nike brand more directly connects with consumers, we see the greatest growth.”
In each of its international geographies, nike.com’s rate of growth outpaced the overall marketplace rate of growth by two times or greater. In North America, nike.com has been accelerating over the last two months.
Campion also noted that Nike “consumer experiences”– including its own DTC channels and differentiated shopping experiences created in partnership with retail partners – comprised more than 50 percent of its total revenue and drove over 100 percent of its revenue growth.
“Nike consumer experiences at retail are also resonating,” noted Campion. “That includes owned and partnered digital and physical experiences.”
At its 2017 Investor Day, Nike had said it plans to expand what it terms “differentiated” spaces to 80 percent of its sales over the next five years, up from 40 percent at the time, with a narrowed focus on about 40 retail partners.
In the Q&A session, Parker noted that Nike is “making some great progress” in its push toward selling in more differentiated environments. The gains were supported by its expansion of Nike+ members and executions around NBA All-star weekend. Conversations with retailers are ongoing.
“We’re working with our key partners to help differentiate them in their respective positions,” said Parker. “Those conversations are ongoing with most strategic partners. We’ve aligned on the role that they play in serving our consumers from the Foot Lockers to Nordstrom. And this is not only physical retail but it’s how physical and digital interact.”
He cited Zalando and TMall and ASOS as pure e-tailers Nike is partnering more closely with. Nike’s Instagram pages are also being reworked to stand out more. Said Parker, “This is a multi-year journey for us. And I’d say we’re making great progress in shaping that marketplace and I think we’ll continue to elevate our own direct business, but we will also help to differentiate and elevate our key wholesale partners along the way.”
China Leads Nike Brands Regional Gains
Among regions, the strongest growth for Nike Brand in the quarter was seen in Greater China, rising 19 percent on a currency-neutral basis. The gain was driven by strong double-digit growth across nearly all areas of the business but led by digital. The digital momentum was fueled by the launch of the SNKRS app in China and the continued success of its partnership with TMall.
Campion said digital growth will gain a further boost by the launch of Nike+ membership in China now slated for Q1 of fiscal year 2019. One area seeing “incredible momentum” in China is women’s, with double-digit growth driven by a strong response to launches and power franchises, including styles designed specifically to connect with consumers around the Chinese New Year.
On a reported basis, sales in China rose 24.3 percent to $1.34 billion. EBIT grew 30.2 percent to $496 million due to strong revenue growth and SG&A leverage.
The EMEA region for Nike Brand in the quarter continued to see strong momentum with currency-neutral sales expanding 9 percent. Said Campion, “Two of the hottest styles in the marketplace are the Air Vapormax and Airmax 97 and we’re also seeing industry leading growth in apparel driven by our Tech Fleece business.”
EMEA was also aided by Express Lane, which Campion said is helping translate regional consumer preferences into color and material updates with its key franchises. Overall, EMEA’s gains were led by “very strong nike.com results, as well as strong results with key strategic partners,” citing JD and Zalando.
Categorically, double-digit growth was seen in sportswear, men’s training and Nike basketball. Continued strong growth in EMEA is expected with a boost from the World Cup.
On a reported basis, EMEA revenue in the quarter increased 19.4 percent to $2.3 billion. EBIT rose 15.5 percent to $417 million as strong revenue growth was partially offset by lower gross margin due to transactional effects.
In the APLA (Asia Pacific & Latin America) region, sales for Nike Brand rose 11 percent on a currency-neutral basis.
“APLA was also fueled by the brand energy surrounding the Winter Olympics in Korea, which helped drive strong and balanced double-digit growth across nearly every dimension, women’s, men’s, footwear, apparel and across many categories,” said Campion.
To drive online growth more broadly, digital platforms are being “more aggressively” rolled out into key markets across APLA. The SNKRS app launched in Japan on March 21 and became Japan’s number one free downloaded app in the iOS store.
On a reported basis, APLA sales rose 13.0 percent to $1.27 billion. EBIT grew 30.7 percent to $298 million, driven by strong revenue growth, gross margin expansion and SG&A leverage.
Globally, revenues for the Nike Brand rose 7.2 percent $8.5 billion. EBIT rose 3.7 percent to $1.4 billion.
Revenues for Converse were down 3.0 percent to $483 million and off 8 percent on a currency-neutral basis. International and digital growth were more than offset by declines in North America. EBIT at Converse was down 36.7 percent to $69 million.
Campion said Nike “will continue to invest in reigniting strong sustainable profitable growth at Converse. More specifically we’re dimensionalizing Converse’s product portfolio through the One Star, Chuck 70 and other sports and sport-inspired styles, investing in more Converse-specific digital platforms and creating heat and energy for the brand through new collaboration.”
Basketball and Sportswear Pace Nike Brand Category Growth
Among categories for Nike Brand, basketball scored a “very strong” quarter, growing double-digits with growth across footwear and apparel in every geography and key cities, said Parker. Launch standouts include Kyrie 4, PG2 and LeBron 15. In apparel, a highlight was the Showtime Hoodie, which Parker described as “a huge hit at retail and it’s driven a whole new silhouette for Nike apparel.”
Nike’s NBA partnership exceeded expectations in its first season with the NBA business growing “significantly’ year-over-year. The NBA All-Star weekend in Los Angeles drove brand awareness for both Nike Brand and Jordan Brand.
Nike during the quarter became the first brand to sell directly through Snapchat with the Tinker AJ III selling out in 23 minutes. SNKRS Stash, which uses geo-locations to unlock access to prized Nike and Jordan products, was also launched with a Cortez collaboration with Kendrick Lamar. Nike also sponsored 85 college teams across the men’s and women’s field during March Madness.
Regarding Jordan Brand, Parker said the company believes with its tightened distribution, the brand is “making the right moves to keep this iconic brand special and create sustained growth.” The brand launched Russell Westbrook’s first signature shoe and also released limited-edition Jordan III’s on the SNKRS app immediately after Justin Timberlake wore them at the Super Bowl halftime show.
Going forward, Jordan Brand “will carefully manage the distribution of iconic styles; we will more completely leverage the company’s innovation platforms to supercharge Jordan’s performance products; we will expand into new categories beyond basketball and sportswear and drive our biggest growth opportunities in international apparel and women’s.”
The running category for Nike Brand is “driving more innovation than any other time in our history,” including the Air Vapormax and React. Express Lane is also helping the running category quickly refresh core styles. For example, this summer the women’s Zoom Pegasus 35 will feature female-tuned cushioning and the new Peg Turbo will include ZoomX foam.
Sportswear continued to grow double-digits with strong growth across apparel and footwear. Tech Fleece led apparel while footwear was led by Air Force 1, Cortez, Blazer, Tenjin and Airmax.
Nike Brand’s women’s business overall “continues to accelerate,” said Parker. A highlight item was the first women’s footwear collection with both Nike Brand and the Jordan Brand that involved a reinterpretation of the Air Jordan 1 and the Air Force 1.
Nike is also introducing Unlaced, a new retail concept for women with sneakers edited by leading stylists but also carrying a wider range of sizes for the first time with exclusive colors and elevated services. The concept will debut at Nike Soho this summer and then roll out to over 200 Nike direct and wholesale partner doors by the end of the calendar year.
Looking ahead, Nike expects Q4 reported revenue to grow in the high single-digit range, reflecting continued strength internationally and flat sales in North America. Gross margins are expected to be flat to up slightly as merchandise margin expansion offsets currency headwinds.
SG&A expense is expected to expand in the low-teens. The increase reflects continuing investments in digital and membership, including the Zodiac acquisition, as well as marketing support for Airmax Day and the World Cup.
Parker also briefly touched on the prior week’s announcement that two executives — Trevor Edwards, Nike Brand president and Jayme Martin, VP and general manager of global categories for Nike Brand — would be stepping down due to workplace complaints.
The CEO said, “I’d first like to acknowledge the changes we made last week to further evolve our culture and restructure our leadership. We became aware of some behavioral issues that are inconsistent with Nike’s values of inclusivity, respect and empowerment.
“I’m committed to ensure that we have an environment where every Nike employee can have a positive experience and reach their full potential. As you know, I publicly committed to serve as chairman, president and CEO of NIKE, Inc. beyond 2020. Trevor Edwards and I both agreed to a change in leadership structure in the Nike brand. At this time, as we transition to our next phase of growth and continue to evolve our culture, Trevor will work with me as an advisor through this transition until he retires in August. And I’d like to thank him for his important and significant contributions in growing and strengthening the Nike brand around the world.
“We have a deep leadership bench at Nike and I’m confident that our restructured leadership team will continue to strengthen our culture and drive the Consumer Direct Offense.”
Photo courtesy Nike