The Nike, Inc. fiscal third quarter analyst conference call last year featured a newly minted CEO conducting his first such call in his new role. It was déjà vu all over again this year as Mark Parker made his conference call debut as CEO of Nike Inc. While much remains the same with the company, much is already changing. Sports Executive Weekly sees a fundamental shift in how Nike Inc. will approach the defense of its market share and brand positioning while acting much more aggressively going after developing markets.
While Western Europe continues to be a drag on the Nike business as it is for other brands, the market share battle with adidas in Japan also appears to be a major focus for Mr. Parker and Charlie Denson, president and CEO of the Nike brand. But continued strength in the U.S., the Americas, and the balance of Asia and Europe helped deliver solid top-line results. Despite challenges in a gross margin line that was impacted by higher oil prices and increased labor costs in China, a focus on expense controls helped boost the bottom line as NKE bested Wall Street EPS estimates by nearly 13% for Q3.
Still, analysts are cautious about the future for the athletic footwear and apparel behemoth as some worried about a slow down in the growth in the U.S. futures backlog - pegged at +6.0% this year versus +9.0% at the end of Q3 last year - and the sharp uptick in inventories at the end of the period. Management seemed little concerned with the slower growth in backlog at period-end, pointing to 14% actual sales growth in the U.S. for the most recent quarter after posting a 9.0% backlog increase at the end of the previous quarter. They expect that more at-once business from performance apparel, owned-retail, and growth in the “Other” brands will enable the company to continue to outpace the growth in the futures book. As for inventories, management said that nearly half the inventory increase was due to in-transit product that shipped out of Asia early. They said the close-out inventory position was basically “flat” to last year at the sale time.
Some see the newly merged adidas-Reebok business as a threat, but SEW suspects the deal that created a company with more than 22% market share in the U.S. athletic footwear business is actually a catalyst that helped reinvigorate the competitive juices inside the berm.
SEW sees adidas Group pre-occupied over the next year with decisions about what each of their brands will represent in the U.S. market while Nike just needs to execute against their plan. The two will probably go head-to-head more in Asia and Europe over the next year as each tries to capitalize on the World Cup in Germany this summer while fighting the market share battle in a Japanese market that has turned more promotional.
The NKE results for the fiscal third quarter through February should be an indicator of things to come for other companies in the industry that report on a calendar year. The affect of foreign currency exchange rates have done a 180 on companies that saw a weaker U.S. Dollar boost results coming out of Europe. This is the first quarter in some time that a company reported top-line sales that were tempered by exchange rates. Only the Americas got a boost from FX rates.
Total currency-neutral sales increased 12% for Q3, compared to a 9.2% increase in the reported currency. Likewise, order backlog at period-end was up 5.4% in currency-neutral terms, compared to a 2.9% increase in reported backlog. Nowhere was the shift in currency more dramatic than in Europe.
At brand Nike, the EMEA region, which includes Europe, the Middle East, and Africa, posted sales growth of roughly 4% on a currency-neutral basis, but showed a 5.2% decline in U.S. Dollars. Excluding the impact of currency, footwear revenues were flat for the quarter, reflecting “strong growth” in the emerging markets of the region and “softer results” in Western Europe. Management said they were “holding our own in a very competitive market.” Equipment sales were up 12% and apparel revenues rose 8%, due primarily to World Cup sales and strong growth in Nike PRO performance apparel, which they expect to exceed the size of their U.S. Nike PRO business in fiscal 2007.
Despite a reported decline in pre-tax income, a look at currency-neutral results reveals a 4% gain versus last year. Gross margins declined 110 basis points for the quarter, which impacted the consolidated GM line by about 30 basis points. CFO Don Blair said that the GM decline was the result of “higher input costs” driven by oil, but was also hit by “growth in customer discounts.”
In Asia Pacific, revenues grew 17% on a constant dollar basis, with footwear sales increasing 23%, apparel growing 10%, and equipment increasing 11% in constant dollar terms.
China was again the primary driver in Asia, growing more than 40% on a currency-neural basis and more than doubling revenues last year. Japan saw revenues increase in the mid-single-digits, but the market remains “highly promotional.”
| Nike, Inc. Fiscal Third Quarter | ||||||
| Regional Operating Results | ||||||
| U.S. | EMEA | Asia/Pac | Americas | Other | Total | |
| Sales | $1,443 | $980.4 | $532.3 | $203.1 | $454.5 | $3,613 |
| Adj. Change* | n/c | 4.0% | 17.0% | 30.0% | n/a | +12.0% |
| Pre-Tax | $286.2 | $208.7 | $119.6 | $38.5 | $43.6 | $506.6 |
| Change | 10.0% | -4.8% | 19.1% | 68.9% | 89.6% | 22.5% |
| Backlog | 6.0% | -2.0% | 5.0% | 10.0% | n/a | 2.9% |
| Adj. Change* | n/c | 3.0% | 9.0% | 8.0% | n/a | 5.4% |
| *Adjusted for Currency-Exchange | ||||||
A new product line focused on lower price points that was introduced in January has apparently been selling through at a strong pace, but apparel sales were said to be “somewhat disappointing.” Gross margins in Asia Pacific declined 80 basis points on top of a 110 basis point decrease in Q3 last year, but improvements in SG&A helped boost pre-tax profits for the region.
The Americas region saw constant dollar revenues increase roughly 30% for the third quarter, with all but one country growing in double-digits for the period. Gross margins were up 160 basis points for Q3, helping push pre-tax income up nearly 69% for the period.
The U.S. saw broad-based growth across most major wholesale accounts, adding about $175 million in business to the top-line for the quarter. Footwear revenues were up 18% and apparel sales rose 6%, but equipment revenues were down 3% for the period. The Jordan brand, which saw revenues jump more than 50% for the period, was called out as a significant contributor to the strong third quarter results. Overall Nike brand unit sales were up 11% for the period, with average selling prices growing in the mid-singles. Management said both were up in the futures order book as well.
Apparel sales in the U.S. were apparently driven by a double-digit increase in sales of performance apparel, including a Nike PRO business that more than doubled.
Gross margins were down 60 basis points in the quarter, reducing the consolidated gross margin by 20 basis points for the period.
Revenue growth in the “Other” brands contributed about 2% of the overall growth for Nike Inc. Converse sales were up more than 25% and Nike Golf revenues increased in double-digits. Pre-tax income for the non-Nike brand business jumped nearly 90% for the quarter, adding about five full points to the consolidated growth in operating income, but the Bauer Nike Hockey business posted a loss for the quarter on investments in re-branding and the Winter Olympics.
Overall demand creation expenses were up 15% for the quarter on a heavy spend on the Air max 360 launch, the Olympics, the World Cup, and other sports marketing investments in the U.S. and Asia.
Other Key Metrics:
- U.S. owned-retail comp store sales were up 5%.
- Sales of Nike PRO apparel outside the U.S. tripled in the third quarter.
- The soccer category is now approaching $1.5 billion in sales versus $40 million in sales when U.S. hosted the Cup in 1994.
- Soccer statement product sales doubled versus last year.
- The womens fitness business grew 19% in Q3.
>>> A lot of mention on the call about things that are important to the competition. A heavy focus on soccer and the Japanese market are clearly designed to address adidas strengths while all the talk about Nike Pro apparel goes to the root of the Under Armour business
>>> Nike looks to be over-investing in its performance apparel business in Europe just as UARM works to establish a beachhead there…
>>> Notice all the lawsuits lately? This is an aggressive team that takes defense of the Nike brand personally. Expect them to be as aggressive going after new business as well…
| Nike, Inc. | |||
| Fiscal Third Quarter Results | |||
| (in $ millions) | 2006 | ||
