Mark Parker completed his first full fiscal year as CEO of Nike, Inc. as the company delivered solid results and a strong outlook for the future. NKE shares were up more than 10% for the week last week to close at $58.29 on Friday. The companys share price has jumped 42.8% since Parker took the reins in January 2006, while the S&P 500 has increased 18.9% over the same period. Not a bad first year. Free cash flow for the year was pegged at $1.6 billion, or about the same amount of debt The Finish Line will need to take on to finance the acquisition of Genesco, Inc.
It was a year and fourth quarter with a number of “firsts” for the company as all regions and all divisions posted positive growth in revenues and futures backlog. The only negatives mentioned for the year were negative comps in outlet stores and an apparel decline in South America.
Inventories at the end of the last fiscal year had Wall Street a bit worried and Parker said at the time that he found inventory levels to be “unacceptable,” so it was no surprise that he highlighted the 2% inventory growth at year-end — far below backlog growth — compared to the 15% increase seen at the prior year-end.
The Nike, Inc. subsidiary businesses, which includes Converse, Nike Bauer Hockey, Cole Haan, Hurley, Exeter Brands, and Nike Golf, saw revenues increase 9.1% for the quarter to $650 million from $596 million in Q4 last year. The “Other” business, as it is called, contributed two points of the overall growth for the company.
For the full year, revenues at Converse, which will turn 100 years old next year, were up 23% to $564 million, driven by strong demand “particularly outside the U.S.” Parker described Q4 as the “biggest global sales quarter ever for Converse.” NKE has just opened a branded space for Converse on Carnaby Street in London. Pre-tax income jumped 133% for the brand.
Nike Golf boosted full-year revenues 12% to $676 million and PTI grew 33%. Cole Haan revenues increased 8% to $471 million for the fiscal year, driven by “strong results at owned-retail stores,” while NBH, Hurley, and Exeter Brands each grew revenues at a double-digit rate.
Pre-tax income for the “Other” businesses nearly doubled for the year and was up 102% to $93.1 million for the quarter. Prior year fourth quarter and fiscal year pre-tax income included a one-time $51.9 million charge related to an arbitration ruling involving Converse and a former South American licensee. In fiscal 2007, the ruling was settled for less than the charge, which resulted in a $14.2 million benefit to Other business pre-tax income. Excluding these items, “Other” business pre-tax income would have decreased 5% for the fourth quarter and increased 41% for the fiscal year.
Nike brand revenue, which also includes the Jordan Brand business, was up 9.5% for the fiscal fourth quarter to $3.73 billion from $3.41 billion in the year-ago period.
Global Nike brand futures orders with shipments through November were up 12% at year-end to $7.7 billion. Soccer futures were up strong double-digits.
Nike brand growth in the U.S. region accelerated in Q4 from the full-year results, increasing 10% for the quarter, in part due to benefits from shipment timing across quarters. Sales at Nike owned-retail stores in the U.S. grew 16% for the quarter as an 8% comp store increase at first quality stores, including Niketown and the Goddess stores, offset a decline in comps at the outlet stores.
The high-single-digit increase in footwear sales in the U.S. in the fourth quarter was attributed to double-digit growth in unit sales, offset in part by a mid-single-digit decline in average selling price. The ASP decline was attributed to a shift in product mix during the period and sales of childrens product and sandals outpaced growth of the overall business. Revenue growth in the other areas of business was said to be “consistent.” A higher percentage of closeout sales during the period also had an impact on ASP.
Based on retail point-of-sale data compiled by SportScanINFO, Nike had a mid-single-digit increase in market share in the Sport Sandals category for the year-to-date period. Sales of childrens Nike and Jordan branded product was up in strong double-digits at retail for the year-to-date period through June, according to the SportScanINFO data. The increase reflects a double-digit increase in average retail selling prices in Nike/Jordan kids Sport Footwear.
Growth in the U.S. apparel business was attributed to gains in Nike Pro and team apparel, partially offset by “softer revenue from sports culture styles.”
U.S. equipment sales gains were attributed to a “repositioned sock line” and higher sales of team sports equipment.
Fourth quarter pre-tax profits in the U.S. were up 20% to $415.2 million.
Total company full year and fourth quarter revenues saw a two percentage point benefit from foreign exchange rate fluctuations.
The EMEA region, which is comprised of Europe, the Middle East, and Africa, saw fourth quarter revenues increase 12.1% to $1.29 billion, but nine points of that growth came from the weaker U.S. Dollar against stronger European currencies. Currency-neutral footwear revenues increased 4% and equipment sales increased 10% for the period, while Apparel revenues increased “only slightly” versus the 2006 results that included the World Cup in Germany. On a currency-neutral basis, all countries in the region posted higher sales, except the U.K. and France. As a group, the emerging market countries were up over 30%, driven by strong results in Greece, Russia and Turkey.
EMEA futures backlog was up 12% at year-end, or 11% on a currency-neutral basis, driven by growth in every major country. Management said they are even starting to see some “tangible signs of improvement” in the U.K. and France, despite a down quarter for the U.K. in Q4. Futures were up for both countries.
Nike brand President Charlie Denson said that Nike is the fastest-growing performance brand in running in Germany and claimed the #2 spot after “grabbing four points of additional market share in this last year.”
Fourth quarter pre-tax income for the EMEA region grew 28.7% to $293 million in the fourth quarter, reflecting “leverage from lower demand creation spending as well as stronger European currencies.” Full-year pre-tax income reached the billion dollar mark for the first time in fiscal 2007.
The Asia Pacific region increased fourth quarter revenues 6.9% to $596.9 million compared to $558.6 million in Q4 last year, with currency exchange fluctuations delivering two points of the growth. Currency-neutral revenues for footwear and apparel were both up 5% and equipment revenues increased 6% for Q4.
Management said that most countries in the region reported double-digit sales growth on a currency-neutral basis for the year, but China remained the primary driver of the regions revenue growth with a 25% increase in sales for the year. Management said China may be their second largest market by 2009. Excluding changes in the value of the Yen, revenues in Japan were “up slightly” for both the quarter and full year, and NKE indicated “encouraging signs” of a turnaround in that market. Japan futures were up at year-end.
Fourth quarter pre-tax income increased 37.3% to $118.5 million, reflecting the timing of demand creation spending and expanding gross margins.
The Americas region reported flat revenues for the fourth quarter as tough World Cup comparisons and softness in Brazil offset positive trends elsewhere. Management expects a return to growth in Brazil in fiscal 2008, due in part to the takeover of the apparel business from a licensee, as well as some “positive signs” for footwear.
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