Nike Inc. reported an impressive 9 percent gain in revenues on a currency-neutral basis in the fiscal second quarter ended Nov. 30, with a 9 percent gain for Nike Brand and 11 percent for Converse. Even more encouraging, future orders were up 13 percent at quarter-end on a currency-neutral basis.
The futures gain was driven by a 10 percent increase in units and a 3 percent increase in average selling prices. Futures for most of Nike Brand’s geographies increased at a double-digit pace, driven by strong demand across multiple categories, including global football, sportswear, running, basketball, and women's training. On a reported basis, futures grew 12 percent, reflecting weaker international currencies.
The momentum encouraged NKE to lift the top-line guidance for the fiscal year, now projecting revenue growth at a high single to low-double-digit rate, up from a high-single-digit rate previously.
“Our ability to surgically focus our resources and align our efforts across multiple areas of our business allows us to successfully invest in our biggest opportunities for profitable, sustainable growth,” said Mark Parker, Nike Inc.’s president and CEO, on a conference call with analysts. “This approach ensures we are in a strong position to manage the macroeconomic challenges when they arise and seize new opportunities when conditions improve, like now as we see initial signs of stabilization in select national economies.”
Earnings from continuing operations improved 3.1 percent to $537 million, or 59 cents a share, besting Wall Street's consensus estimate by a penny. Company-wide fiscal second revenues increased 8.0 percent to $6.4 billion.
Besides the top-line gains, the gain was aided by gross margins coming in better than anticipated, up 140 basis points. That helped offset higher SG&A costs due to investments in the World Cup and other upcoming events as well as currency headwinds. Changes in currency exchange rates were estimated to have reduced EPS growth by about 10 percentage points for both the second quarter and year to date.
Total Nike Brand revenues were up 7.5 percent in the quarter to $6.07 billion and grew 9 percent currency-neutral. By category, footwear was up 9.0 percent to $3.61 billion, apparel advanced 5.8 percent to $2.06 billion and equipment inched ahead 1.9 percent to $370 million. On a currency-neutral basis, footwear was ahead 11 percent, apparel added 7 percent and equipment grew 4 percent. Nike Brand EBIT was ahead 1.6 percent to $845 million.
Gains for the Nike Brand came across every product type, geography and key category. The Nike Brand DTC revenue increased 19 percent, driven by 10 percent comp store growth, new stores, and a strong increase in online sales. E-commerce companywide saw 33 percent revenue growth.
“When you combine our full pipeline of innovative products, our strong connection with consumers, and our ability to create compelling retail presentations and elevate the marketplace, it's a winning formula for growth,” said Trevor Edwards, president, Nike Brand, on the call.
In the North America region, revenues for the Nike Brand rose 9.2 percent to $2.8 billion. Footwear gained 9.9 percent to $1.63 billion, apparel moved up 9.2 percent to $986 million, and equipment gained 3.9 percent to $188 million.
The gains were driven by growth across all key categories, including double-digit growth in basketball and women's training. DTC revenues grew 12 percent in the quarter, driven by 7 percent comp store sales growth. On a reported basis, second quarter EBIT for North America grew 14.9 percent to $649 million, due to strong revenue growth and gross margin expansion. North America futures were ahead 11 percent.
On the call, Edwards said EBIT grew in the North America region for the sixth quarter in a row. He said Nike’s category offense across channels in the region is helping driving consistent expansion in the largest categories, like running and basketball while also enabling Nike Brand to “aggressively attack our biggest growth opportunities, like our young athletes and our women's businesses.”
Nike Brand’s young athletes business grew double-digthe in the North America region, and growth is expected to accelerate through new retail concepts with wholesale partners like the Nike Fly Zone at Kids Footlocker. In women’s, the Nike Training Club initiative is being expanded beyond the 20 doors it launched in August to over 40 expected by the end of the fiscal year. Overall, Nike’s women’s business is “very strong” in the North America region with the Training Club doors significantly outperforming other locations.
In Western Europe, sales for Nike Brand increased 18.3 percent to $1.07 billion. Footwear grew 27.1 percent to $695 million, apparel increased 5.9 percent to $324 million, and equipment was flat at $55 million. On a currency-neutral basis, total sales grew 15 percent with gains of 23 percent in footwear and 3 percent in apparel offsetting a 2 percent slide in equipment.
The gains were led by double-digit growth in sportswear, running, basketball, and women's training, as well as in the young athletes business. The territory performance was led by the UK and AGS (Austria, Germany, and Switzerland), with revenues increasing over 20 percent in each territory. On a reported basis, Western Europe EBIT gained 11.8 percent to $123 million, driven by revenue growth and gross margin expansion. Western Europe futures were up 26 percent on a reported basis and 23 percent currency-neutral.
Edwards said Western Europe is benefiting from a decision about two years ago to put a new, more centralized organizational structure in place to better manage key partner relationships and accelerate the implementation of the category offense in the region. Said Edwards, “That decision is delivering tremendous results.”
Double-digit DTC growth is being seen along with strong growth with the wholesale partners, with the aid of retail partnerships such as House of Hoops with Footlocker in the UK, or shop-in-shop executions with Karstadt in Germany, or Futbolmania in Spain.
In Greater China, sales for Nike Brand were up 8.1 percent $629 million, Footwear was ahead 10.5 percent to $358 million and apparel rose 7.4 percent to $245 million but equipment fell 13.3 percent to $26 million.
On a currency-neutral basis, sales increased 5 percent, led by growth in basketball, running, sportswear, and global football. An 8 percent gain in footwear and 4 percent increase in apparel offset a 15 percent slump in equipment.
Greater China’s EBIT gained 5.3 percent to $197 million as revenue growth was partially offset by investments in the DTC business. Greater China's futures were up 4 percent on a reported basis and 1 percent currency-neutral.
Edwards said Nike is “making good progress” in the reset in that region. The changes include segmenting and differentiating the points of distribution; sharpening the merchandising strategies, including recently tested four new concepts at retail; and creating a more seamless operating platform to improve deliveries.
“While we're still relatively early in the reset process, the results are very encouraging,” said Edwards. “Comp store sales in our DTC stores were up over 20 percent in Q2, and our wholesale partners are seeing improvement in those stores that have been re-profiled. In these stores, revenue and sell-through rates are above fleet averages, and inventory levels are improving throughout the marketplace.”
Nike continues to expect overall FY14 revenue in China to be roughly in line with the prior year, with single-digit revenue growth in third quarter and flat to down revenue in fourth quarter.
In Emerging Markets, sales for the Nike brand were down 4.1 percent to $1.03 billion due to currency headwinds. Footwear was off 5.7 percent to $686 million and apparel gave back 1.8 percent to $279 million while equipment added 4.8 percent to $65 million.
On a currency-neutral basis, sales were ahead 3 percent, driven by higher revenues in nearly every territory and double-digit growth in the largest territory, Brazil. On a currency-neutral basis, footwear grew 2 percent, apparel advanced 5 percent and equipment jumped 14 percent.
Emerging Markets EBIT was down 18.4 percent to $243 million due the adverse currency fluctuation as well as increased marketing spending in advance of the World Cup and higher operating overhead for new retail stores and the launch of Nike.com in Brazil. Emerging Markets futures were up 7 percent on a reported basis and ahead 15 percent currency-neutral.
Although Emerging Markets revenues were above the prior year, the rate of growth was significantly below the rate Nike expected, driven primarily by the impact of ongoing supply chain challenges in Mexico. In June, Nike transitioned to a third-party logistics provider in Mexico.
“The transition did not go as smoothly as planned,” admitted Edwards. “As a result, shipments from our distribution center to our wholesale partners were delayed, leading to a buildup of inventory in the distribution center and a shortage of Nike product in the market.”
Nike is working with the third-party logistics provider to resolve the issue, and expects to be shipping to demand by the end of third quarter. Edwards said it “will take a few quarters for us to fully regain our business at retail and address residual inventory issues. Despite these short-term challenges, the Nike Brand continues to lead in Mexico and the emerging markets overall.”
In Central & Eastern Europe, sales for Nike Brand increased 17.1 percent to $295 million. Footwear was ahead 16.1 percent to $144 million, apparel jumped 18.4 percent to $135 million, and equipment rose 14.3 percent to $16 million. On a currency-neutral basis, total sales grew 18 percent with gains of 16 percent in footwear, 21 percent in apparel and 10 percent in equipment. Central & Eastern Europe EBIT gained 29.7 percent to $48 million. Central & Eastern Europe futures were up 13 percent on a reported basis and 14 percent currency-neutral.
In Japan, sales for Nike Brand were down 12.5 percent to $210 million. Declines were seen in all categories: footwear off 7.3 percent to $101 million; apparel, 19.1 precept to $89 million; and equipment, 4.8 percent to $65 million. On a currency-neutral basis, sales were up 9 percent, led by a 17 percent gain in equipment, followed by a 15 percent climb in footwear and a 1 percent lift in apparel. Japan’s EBIT moved ahead 4.4 percent to $47 million, reflecting the currency challenges. Japan's futures were down 10 percent on a reported basis but up 1 percent currency-neutral.
Among categories, Edwards noted that basketball globally marked the largest volume for any quarter in Nike’s history. Double-digit growth was seen in every geography, equally supported by the Nike and Jordan brand. He credited Nike’s basketball success to the relationships with elite NBA players that “gives us unrivaled insight that leads to amazing product innovations which fuel our ability to inspire consumers all over the globe.” Strong sell-throughs were seen from the KD 6, Lebron 11, and the CP3.VII, Chris Paul's signature shoe. The Kobe 9 Masterpiece, the first basketball shoe to use Flyknit technology, becomes available in February.
Edwards also talked up the growth potential around global footwear with the World Cup six months away. Nike has 10 teams competing and the “best lineup of product that I have ever seen.” The Hypervenom earlier this year was Nike’s most successful boot launch ever.
Converse revenues were up 13.9 percent to $360 million inthe fiscal quarter. Currency-neutral sales gained 11 percent, driven by a strong performance in the largest owned markets: North America, the United Kingdom, and China. Converse’s EBIT improved 9.9 percent to $100 million.
Parker said Conserve is making a “huge commitment to diversify” beyond Chuck Taylor All-Star collection on the footwear side while also expanding deeper into apparel, which he called “just in the infancy stages.”
Said Parker, “Converse is a global brand with a rich history, and we continue to leverage this legacy to drive growth by making Converse relevant to each new generation of consumers around the world.”
Gross margin increased 140 basis points to 43.9 percent, benefitting from a shift in the mix of the company’s revenues to higher margin products and businesses, higher average prices, easing raw materials product input costs and continued strength in the higher margin direct-to-consumer (DTC) business. These benefthe were partially offset by unfavorable changes in foreign exchange rates and higher labor product input costs.
SG&A expenses grew 14 percent to $2.1 billion. Demand creation expense was $691 million, up 13 percent versus relatively low levels in the prior year, driven by marketing support for key product launches, consumer running events and upcoming global sporting events, including the World Cup and Winter Olympics. Operating overhead expense increased 14 percent to $1.4 billion due to investments in digital innovation and other growth businesses, as well as higher DTC costs driven by growth and new store openings.
Looking ahead, Nike expects revenue for third quarter to grow at a high single-digit to low double-digit rate, and fourth quarter to grow at a low double-digit rate, with both rates reflecting pressure from weaker developing market currencies.
Gross margins are expected to expand by about 25 basis points in each of third quarter and fourth quarter. Gross margin for the first half of the fiscal year exceeded expectations due to a mix shift to higher-margin products, higher average selling prices, and continued strength in the DTC business. But Nike said it’s facing new pressures as raw material costs shift from tailwinds to headwinds and we increase discounts to clear pockets of excess inventory. For full year FY14, Nike now expects gross margin expansion of approximately 75 basis points.
