“It is a good day today.” That statement by Charlie Denson, co-president of Nike Brand, in his prepared remarks on Thursday evening probably best summed up the upbeat mood on the Nike campus after releasing their most recent fiscal year-end and fourth quarter report. It is also probably the understatement of the year as the company starts to look more like Microsoft in their dominance of the sporting goods landscape.
By our estimation, Nike now commands about 39% of all sales by athletic footwear companies and represented 41% of all sales of the public footwear companies tracked in our quarterly reports in the most recent quarter.
Upon further review and analysis of the companys numbers and comments by management, it now appears that Nike may now be just emerging from another of its staging plateaus, a period where the company invests heavily for the next major business upswing. If this observation holds true, the company should be headed for another three- to five-year period of major growth that will see it widen its gap with the rest of the pack.
Nike, Inc. produced 72% more revenue than its closest competitor, adidas-Salomon AG, in the most recent quarter, and generated 4.2x the revenue of Reebok International LTD, the last company to claim the number one spot in the U.S. footwear market. In the U.S. market, Nike brand sales were 3.9x adidas brand sales in the most recent quarter and 3.6x Reebok brand sales for the period. (see chart page three)
Perhaps even more significant to Nikes future plans is the widening gap with the adidas brand in Europe. Nike brand in the EMEA region again surpassed adidas brand sales in the most recent quarter when the Euro currency is translated into dollars at the average FX rate for the period. They also generated 2.8x Puma sales for the region during the period. Reebok doesnt break out Europe sales, but the business in the region was the biggest drag on Reeboks performance in the most recent quarter.
Nike is now claiming the top spot in Football (Soccer) in Europe, just as the Euro 2004 championships focus full attention on the sport in the region.
Management pointed to NPD footwear sales data for the 12 months through March that Nike had passed adidas in Football market share in the “five big countries in Europe” as well as in the northern European countries.
They remarked that the data does not measure gains seen since their efforts in the run up to Euro 2004. Mark Parker, Nike brand co-president, said the goal is to become the “leading football brand in the world”. He said the brands global Football business has “more than doubled” since fiscal 2002.
A heavy concentration of other events throughout the region during the year, such as the Tour de France, Wimbledon, the French Open, and the Olympics, has Nike licking its chops for a bigger payoff in the coming year.
Fourth quarter revenues for the EMEA region grew 15.5% to $1.09 billion, but saw sales only increase approximately 2% in currency-neutral terms. Footwear revenues were up 4.7% for the period to $632.0 million from $603.5 million in Q4 LY, but FX rates contributed thirteen percentage points of the gain, more than offsetting declines from a “change in seasonal product flow”. Management said that Apparel posted “accelerating growth” over the year after early challenges, as Q4 sales increased 33% versus last year. The gains in fiscal Q4 were said to be driven by product and marketing initiatives around the Euro 2004 championships. The 43% jump in Equipment sales for Q4 was also attributed to “robust sales of Football product”.
EMEA futures backlog for the Fall/Holiday time frame was up “mid-single-digits” at the end of the period.
Pre-tax profits for the region, which includes the Middle East and Africa, were up 42.4% for the quarter to $233.9 million. Gross margin for the European region improved 340 basis points for the year, accounting for 110 basis points of overall NKE margin improvement.
Regarding Asia Pacific, Denson said he would love for A/P to be the “next Europe”, in reference to the Europes ten straight years of growth. One analyst was attempting to get Denson to throw out a revenue opportunity for the region and Denson simply answered “China”. There is no doubt the country is the next big battleground for the brand in the run up to the Olympics in Bejing in 2008.
China reported a 66% increase in revenues for the year while Japan was said to have posted the highest absolute revenue gain with double-digit growth. Nike said revenues grew in “nearly every country in the region”.
Asia Pacific revenues increased 25.2% to $450.0 million in the fourth quarter, and were up roughly 10% on a currency-neutral basis. Pre-tax profit was up 18.7% to $92.5 million for the quarter. Asia Pacific full year revenues increased 19.6% to $1.61 billion, compared to $1.35 billion last year. The full year gain was about 12% in currency-neutral terms. Gross margins improved 100 basis points for the year. Futures backlog for Asia Pacific at year-end was up 21%, or up 19% in currency neutral terms.
The Americas is starting to become a more stable business environment, according to Denson, who also said that the company “could be more aggressive” in the region if they could “mitigate some of the currency and geopolitical risk”.
Fourth quarter revenues were up 25.2% in the Americas, or up roughly 17% in currency-neutral terms. Pre-tax income was up 22.9% to $30.1 million in the quarter. Full year growth of 19.6%, or about 12% in currency-neutral terms, was driven by “robust revenue growth in Brazil and Argentina. Gross margins fell 230 basis points for the year, reducing total company GM by 10 basis points. Futures backlog was up 4% in the Americas at year-end, but up 10% currency-neutral.
The U.S. region has a whole separate set of opportunities for the brand as consolidation at retail clearly works in the companys favor. The New TSA made a big deal about more full service footwear areas in their stores to support increased allocations of Nike Marquee product and the brand stands to see nice gains coming out of Dicks with their acquisition of Galyans (see page 5). Dicks already has more Nike shops than any other retailer and the two will surely work closely together to expand that number further.
Foot Lockers acquisition of the Footaction stores was also seen as a positive, with Denson making nice, politically correct statements about how the process has “run its course” and that Foot Locker is the “proud new owner” of the remaining Footaction stores. What appears to be unresolved is just what FL plans to do with the chain and how Nike will handle its mall presence. Denson said that Nike will “look to create points of differentiation” within the mall, but gave little direction on what that meant for Foot Locker or Finish Line.
Foot Locker appears to want to move their namesake chain back into the marquee spotlight, but Nike hasnt publicly acknowledged the concept through either words or actions at this point. Increased flow of marquee goods are expected to hit the Foot Locker stores for BTS and the market will get a clearer picture at that point.
What is clear is that Nike is definitely selling FL more product after Nike said that Foot Locker orders, including Footaction, were higher that than prior year orders for the two chains.
The FL order growth at year-end accounted for three percentage points of the 10% U.S. backlog increase at the end of the period. U.S. inventory was off 11% at year-end. U.S. pre-tax income totaled more than $1.0 billion for the year, a 5.4% increase versus the previous year, but Q4 pre-tax was off 2.4% to $287.3 million. U.S. gross margins improved 140 basis points for the year, with half the gain coming from higher GM on in-line FW sales and the balance due to “better margins on close-out footwear, in-line apparel, and retail sales.
Denson said the Nike retail division had “their best year ever” and the best comp sales gain since fiscal 1998.
Nike said they expect to be paid “most, if not all” of what is owed them by Footstar. They said the Footstar BK had “minimal impact” on Q4 revenues as the lower sales to FA were offset by higher sales to other accounts, including Foot Locker.
The company said that the Converse acquisition accounted for “just under half” the growth of the “Other” category for the year. Hurley reported a 35% increase in sales while Nike Golf, BNH and Cole Haan each grew over 20% for the year.
