Nike, Inc. returned to top– and bottom-line growth in the fiscal third quarter through February as management calls out improving trends across all Nike brand product types, categories and regions.  While the company saw healthy revenue gains for the period, more than two-thirds of the increase came from a stronger U.S. dollar, but the company and Wall Street both pointed to the healthy futures backlog numbers ahead as evidence of even more improvement down the road.

 

NKE revenues increased 6.6% for the third fiscal quarter, but rose just 2% when measured in currency-neutral terms.  Revenues for three-month period ended February 28 were $4.73 billion compared to $4.44 billion in the year-ago quarter.   

 

Third quarter net income more than doubled versus the year-ago period to $496.4 million, or $1.01 per diluted earnings per share, helped in large part to the comparison to fiscal Q3 last year, which included a $241 million after-tax non-cash charge related to the impairment of goodwill, intangible and other assets of the company’s Umbro subsidiary.  Excluding that charge, net income would have improved 2% versus the prior-year period.

 

Gross margins improved 300 basis points to 46.9 % of sales, which management attributed to hot products, improved in-line product margins, less discounted close-out sales and improved off-price margins, favorable changes in product mix and lower raw material and freight costs. The lower off-price volumes were driven by clean inventory positions at Nike and at retail and the growth and expanding profitability of Nike-owned retail.  Expanding margins in NKEs subsidiary business was also cited as a margin builder.  Foreign currency exchange fluctuations were said to be a modest gross margin headwind in the quarter.

 

SG&A improved by 260 basis points to 33.0% of sales, representing a 16% increase (11% currency-neutral) in expenses for the period, due to the timing of demand creation spending and marketing expenses like the Winter Olympics, investments in company owned-retail and higher costs for performance-based compensation.  Demand creation alone was up 11% on a currency-neutral basis.                                            

 

Operating overhead also increased 11%, driven primarily by increased accruals for performance-based compensation and the expansion of Nike-owned retail, which increased retail operating expenditures by 9% in the period. Excluding performance-based compensation, wholesale Op Ex increased only slightly.

 

The consolidated Nike and Jordan brands posted another sequential improvement in the backlog numbers, taking the positive 4% (-1% currency-neutral) backlog position for footwear and apparel at the end of Q2 and pushing the number up 9% through July. Excluding the shift in currency exchange rates, backlog increased 6% at quarter-end to $7.1 billion. 

 

Looking at the third fiscal quarter, total consolidated Nike and Jordan brand sales increased 5.7% for the period to $4.08 billion, while the consolidated Subsidiary business jumped 13.2% for the period. 

 

Footwear sales for the two brands under the Nike umbrella increased 7.0% for the quarter to $2.66 billion, a sharp reversal from a decline in the fiscal second quarter.  Apparel sales were up 2.8% to $1.16 billion and equipment increased 2.2% to $242.3 million for the period. 

 

Currency-neutral revenues were up 1% for the quarter, with currency-neutral footwear revenues up 2%, apparel revenues down 3% and equipment revenues down 3%.

 

Worldwide Nike Direct-to-Consumer revenues increased 19% for the quarter and gross margins for the Direct business improved 390 basis points for the period.

 

The new North America region, which includes the U.S. and Canada, saw total revenues inch up 1.0% to $1.68 billion for the combined Nike and Jordan brands.

 

Nike North America direct-to-consumer revenues jumped 20% for the quarter and gross margin for the business expanded 550 basis points for the period.  Footwear revenues dipped 1.0% to $1.19 billion, but apparel revenues improved 5.7% to $408.6 million and equipment revenues grew 8.5% to $84.5 million.

 

Nike brand President Charlie Denson said the North America apparel is beginning to see positive results from stronger product, more focused assortments and more disciplined distribution.  Apparel revenues were up 5% for the period and gross margins expanded over 3 points. 

 

Denson said they continue to see further improvement ahead after apparel futures for North America grew double digits at quarter-end.
From a total category perspective Q3 revenue growth from basketball, soccer, men’s training and action sports was more than offset by declines in running, sportswear and women’s training.

 

Denson they were particularly encouraged by the futures trend for running, which posted nearly 30% growth in futures for the upcoming summer and fall seasons.

 

North America EBIT increased 3.7% to $402.4 million as improved gross margins more than offset higher demand creation, retail operating overhead, and performance-based compensation. The remainder of wholesale operating overhead was flat with the prior year.

Western Europe revenues were up 4.5% to $929.2 million for the quarter, with footwear revenues increasing 8.4% to $577.0 million, apparel revenue dipping 0.8% to $300.1 million. Equipment revenue declined 4.4% to $52.1 million.  On a currency-neutral basis revenues were down 5%, with footwear down 2% for the period and apparel falling 10% as a result of tough market conditions and lower off-price sales.                            

 

Most territories in the region reported lower revenues for the quarter, but Nikes largest market in Europe, the U.K., rebounded with double-digit currency neutral growth for the period, driven by strength in football (soccer) and sportswear, as well as improved retailer performance. 

 

Looking at categories in Western Europe, double-digit growth in football (soccer), action sports and basketball was offset by declines in sportswear, running and men’s and women’s training.

 

Futures growth for Western Europe accelerated to 7% at quarter-end, reflecting accelerated growth in the U.K., Northern Europe, Iberia, and Nikes largest territory, AGS, comprised of Austria, Germany and Switzerland. Revenue trends also reportedly improved in France.

 

Football (soccer), running and action sports were said to be the key category growth drivers.

 

For the quarter, EBIT for Western Europe was essentially flat at $199.2 million as gross margin expansion, lower operating overhead, and favorable currency translation were offset by lower currency neutral revenues and higher demand creation.

 

Central and Eastern Europe revenues declined 8.4% to $271.5 million for the period and fell by 18% measured in currency-neutral terms.

 

Management said they are beginning to see improvement in the marketplace despite the reality most countries in the region continue to experience high levels of economic volatility and unemployment.

Regional futures showed sequential improvement from Spring through Summer and Fall 2010. Russia was described as the most difficult market in the region, as retailers struggle with tight credit and a promotional marketplace, but management said they have seen some improvement there.

 

South Africa posted double-digit revenue growth in the third quarter, driven by strength in the football (soccer) category in advance of the World Cup.

 

EBIT for the CEE region fell 47.1% to $50.3 million, due to lower revenue and gross margins, increased demand creation, and higher reserves against accounts receivable.

 

The Greater China revenue trend, which also includes Taiwan and Hong Kong, reversed course in the fiscal third quarter, increasing 10.4% to $458.0 million.  Currency-neutral revenues were also up 10% for the period.

 

Footwear revenues increased 11%, and apparel revenues were up 7% for the quarter, driven by China’s three largest categories, sportswear, running and basketball. Management said the three categories also helped drive futures growth up 9% at quarter-end.

First quarter Greater China EBIT jumped 20.9% to $175.7 million, driven by revenue growth and strong gross margin expansion. Inventories were said to be down 27% year-over-year, reflecting clean positions both on the books and in the marketplace.

 

Japan region fiscal third quarter revenues were down 7.4% to $213.0 million and were down 10% in currency-neutral terms.   On a constant currency basis, footwear revenues declined 9% and apparel revenues declined 12% for the quarter.

 

Management said that without a doubt, Japan has been the most challenging market for the Nike Brand, suggesting that continued deterioration in macroeconomic conditions, eroding consumer confidence and a highly promotional marketplace all are contributing to a sluggish retail environment in Japan. Still, they said are performing better than the industry and are continuing to do the right things to return this market to sustained profitable growth.

 

EBIT for the Japan region fell 16.1% to $39.7 million as lower revenues and higher SG&A were partially offset by gross margin improvements.  Japan inventories were down 12% versus the prior year.

 

The Emerging Markets region, which includes South America, Central America, including Mexico, the Pacific Countries, and Korea, saw fiscal Q3 revenue jump 43.4%% to $509.2 million for the quarter, due in large part to changes in foreign currency exchange rates. Excluding currency changes, revenue were up 25% compared to last year,

 

Management said nearly every market in the region reported strong growth. Revenues in Brazil grew over 60%, as Nike continues to expand distribution and energy builds around the World Cup. Mexico and the Southern Cone territory, which includes Argentina, Chile, Uruguay and Paraguay, each delivered growth of about 30%, while Korea posted 15% growth for the quarter. Focus on football (soccer), running and sportswear categories fueled the growth.

 

Emerging Markets futures were up 36% on a currency-neutral basis at quarter-end.

 

Emerging Markets EBIT jumped 72.4% to $121.9 million, driven by revenue growth and SG&A leverage.

 

In the Other Businesses segment, which includes Cole Haan, Converse, Hurley, Nike Golf, and Umbro, revenues increased 13.2% (+11% currency-neutral) to $656.0 million in the fiscal third quarter.

 

Converse revenues grew 4% for the quarter. Revenues at Umbro more than doubled in the period, and were reportedly up over 20% year-to-date, which management said was driven by successful launches of new kits for the English National Team and Man City, as well as growth in the branded business in the U.K.  Hurley had double-digit revenue growth for the quarter. Sales at Cole Haan and NIKE Golf were essentially flat for the quarter.

 

Third quarter Other Businesses EBIT was $105.1 million versus a loss of $342.9 million last year, which includes the previously mentioned charge from last year associated with the Umbro business.  Excluding this charge, the Subsidiaries EBIT increased 80% compared to the same period last year, driven by more than 3 points of gross margin improvement and SG&A leverage.

 

Looking ahead, NKE expects to report mid- to high-single digit revenue growth in the fourth quarter, yielding a slight decline in revenue for the full fiscal year.

 

Fourth quarter gross margins are expected to be well above last year’s fourth quarter, but it reflects somewhat less year-on-year expansion than this year’s third quarter. NKE expects fourth quarter SG&A to grow about 20%, driven by demand creation investments such as the World Cup. Higher year-over-year performance-based compensation and investments in retail are also expected to increase fourth quarter operating overhead.

 

For the full year Nike, Inc. expects to report a low-single digit increase in SG&A.