Shares of Nike Inc. rose to their highest levels since the company went public in 1980 after its first-quarter profit easily exceeded Wall Street targets and management indicated orders in North America and China were running up well into the double digits.
Fiscal first quarter earnings rose 9.0% to $559 million, or $1.14 a share, for the three-month period ended Aug. 31, ahead of the Street's consensus estimate of $1.00 a share. Sales grew 7.8% to $5.2 billion on a reported basis and were up 10% excluding currency fluctuations. Nike brand futures rose 10% — or 13% excluding the impacts of currency fluctuations — the brand’s biggest increase in over a decade.
Nike's revenues have rebound sharply in the last three quarters after weak demand at the heart of the downturn forced it to cut costs and inventory to protect the bottom line.
“We’re looking at a continued healthy recovery,” said company CEO Mark Parker on a conference call with analysts. “I still contend a slow, steady state of recovery. I don’t see dramatic shifts in that course at this stage.”
Total Nike brand revenues increased 6.2% to $4.47 billion and grew 8% on a currency-neutral basis, driven by growth across all seven categories: action sports, athletic training, basketball, football (soccer), running, sportswear and women’s training. By category, footwear rose 7.2% to $2.8 billion and apparel rose 6.7% to $1.36 billion while equipment declined 4.8% to $276 million. In constant currencies, both footwear and apparel climbed 9% while equipment was down 3% for the period.
Management described the Nike-brand direct-to-consumer business as “on fire” with retail stores delivering record revenues and digital sales rising 22% for the quarter.
Nike brand North America division sales grew 8.1% to $1.9 billion. Direct-to-consumer sales increased 15% and wholesale increased 7%. Comps at Nike-owned stores jumped 13% while online sales increased 22% — both driven by higher traffic conversion and average transaction size.
Constant currency futures for North America were up 14% at period-end, reflecting double-digit growth in running, men's and women's training, football and action sports.
“Futures for holiday and spring are up strong double digits in nearly every category, including women's training which is steadily gaining share with its apparel business,” said Charlie Denson, Nike brand president, on the call. “And we expect women's training to see additional success and revenue when we introduce a major new technology and performance story around Nike Free footwear in the spring.”
He also said bookings to sporting goods accounts were particularly strong. “The performance product has accelerated at a faster pace than the sportswear area,” said Denson. “So the sports specialty channels and the athletic sporting goods channels are all doing extremely well.”
By category in North America, revenues in apparel increased 16.0% to $515 million, reflecting 18% growth in full-price sales and a decline in closeouts. Quarter-end futures for apparel increased over 20% as all seven key categories trended higher. Footwear revenue in North America increased 5.7% to $1.29 billion, driven by a 7% increase in full-price sales partially offset by a significant drop in off-price revenues. Running drove the gains, driven by strong demand for Lunar and Nike Free. Basketball, football and men's training also delivered strong growth for the quarter. Footwear futures grew at a double-digit rate, reflecting “tremendous strength” in its performance categories. Nike-brand equipment sales slid 2.1% to $99 million. First quarter EBIT in North America improved 8.5% to $446 million, driven by revenue growth and SG&A leverage.
In Western Europe, Nike brand revenues slipped 4.4% to $1.06 billion but advanced 6% on a currency-neutral basis. Every territory reported higher revenue for the quarter on a constant-currency basis, with running, football (soccer) and action sports leading the categories. On a currency-neutral basis footwear grew 10% driven by continued World Cup momentum while apparel grew 3%, reflecting 5% growth in full-price sales and significantly lower off-price revenues. Apparel sales increased 3% while equipment slid 5%.
Fiscal first quarter EBITDA for Western Europe declined 3.5% to $279 million due to planned World Cup marketing investments and currency headwinds that put pressure on gross margins. Currency-neutral futures were up 6% at quarterend.
Denson predicted a return to growth for Western Europe as economies there show signs of stabilizing. “We saw dramatic growth in running, football and action sports,” he said. “In the U.K. specifically we saw solid futures growth in basketball, football and men's and women's training,” he said.
In Central and Eastern Europe, sales for the Nike brand were up 3.1% to $263 million but gained 9% on a currency-neutral basis. Russia and Turkey each recovered, growing more than 40% on the strength of the football, sportswear and running categories.
Currency-neutral, footwear grew 12% and apparel climbed 10% while equipment gave back 7% in the period. EBIT in the region dropped 18.2% to $63 million, reflecting the impact of currency headwinds on margins and World Cup marketing initiatives.
Currency-neutral futures were up 14%, with strength seen across all categories.
Said Denson, “Still a lot of choppiness in that geography, but nice to welcome them back to the positive side of the growth equation.”
In Greater China, sales for the Nike brand advanced 10.6% to $460 million, including one percentage point of benefit from currency changes. Growth was fueled by expanding points of distribution and the success of product launches and event marketing, including grassroots tours by Kobe Bryant and Kevin Durant. On a currency-neutral basis, sales grew 12% in footwear, increased 8% in apparel and grew 10% in equipment. Footwear and apparel growth was driven by double-digit increases in running, basketball, sportswear and action sports.
Greater China's EBIT advanced 10.1% to $164 million as revenue growth and higher gross margins more than offset increased marketing investments. Constant currency futures grew 23% with double-digit growth in nearly every category.
“The big story there continues to be basketball which shows no signs of slowing down,” said Denson. “Kobe is a living legend in China and his signature product continues to absolutely kill it at retail.'
Japan's revenues for the Nike brand dropped 12.4% to $163 million and fell 18% in constant dollars, reflecting off-price sales more than 50% below last year's levels. Currency-neutral, sales declined 17% in footwear, 16% in apparel, and 24% in equipment. Japan's EBIT dropped 22.9% to $27 million as lower revenues and higher SG&A were partially offset by stronger gross margins. Japan's currency-neutral futures were down 14% at quarterend.
Denson said Nike's technical running product is performing relatively well in the region but the country “continues to work to one of the toughest economies in decades.” A strong focus will remain on improving profitability. Inventories were down 30% in the region at period-end.
In its Emerging Markets division, Nike-brand revenues jumped 30.4% to $591 million and ran up 24% on a currency-neutral basis. Currency-neutral, sales were up 29% in footwear and 22% in apparel but were down 5% in equipment.
Excluding currency fluctuations, most territories and categories grew sales double digits with Brazil and soccer leading the way. Across the emerging markets geography, soccer revenues continued to grow at a healthy double-digit rate as a result of strong product reception, marketing and retail execution around the World Cup. Revenues in Brazil, Nike’s largest country in the division, grew nearly 70% in Q1, driven by soccer and sportswear. Investments in the 2014 World Cup and the 2016 Olympics were said to be already paying off.
EBIT for the emerging markets increased 17.0% to $124 million as revenue growth was partially offset by increased marketing costs. On a constant-currency basis, region futures climbed 24% at Aug. 31. Denson said the region “has consistently posted double-digit growth and revenue futures and EBIT.”
Nike's Global Brand Divisions segment, representing the Nike brand licensing business, generated $32 million in sales, up 3.2% on a recorded basis and up 6% currency-neutral. The segment lost $250 million against a loss of $181 million a year earlier. The segment also includes general and administrative expenses that are centrally managed for the Nike Brand.
In the Other Businesses segment, sales advanced 14.7% to $693 million and grew 16% on a currency-neutral basis, reflecting double-digit growth at Converse, Hurley and Umbro and high-single-digit growth at Cole Haan and Nike Golf. EBIT for the segment grew 25% to $109 million, reflecting revenue growth and strong gross margin expansion for most of the brands.
Companywide, gross margins improved 80 basis points to 47.0% due to growth and improved profitability from direct-to-consumer operations, fewer and more profitable close-out sales and improved in-line product margins. Those factors more than offset margin pressures resulting from changes in foreign currency and higher airfreight costs. Gross margins exceeded internal expectations as a result of the delayed impact of higher input costs as well as the positive effect of strong demand and tight inventories.
SG&A expenses were up 8% to $1.7 billion due to planned marketing investments, which increased 23% to $679 million primarily as a result of marketing expenses incurred for the World Cup and World Basketball Festival. Operating overhead spending was $994 million, in line with last year, as investments in its direct-to-consumer business and event marketing were offset by changes in stock-based compensation expense.
On the call, Denson highlighted a number of marketing successes in the quarter, including its Write the Future campaign for the World Cup being viewed more than 52 times online. The U.S. Open of Surfing, the first event sponsored collectively by NIKE 6.0, Hurley and Converse, drew more than 600,000 people to Huntington Beach in California. Nike also orchestrated the World Basketball Festival, a four-day event in New York City.
Among products, Denson noted that more LunarGlide shoes were sold in Q1 than any other performance shoe in any other quarter in Nike's history. Said Denson, “It's also proving to be a powerful crossover shoe between technical performance and style, again, an opportunity we started talking about a few years ago and a perfect example of how performance product can drive both sides of the business.”
Denson also cited the next evolution of Pro Combat apparel introduced on 10 elite college football teams a few weeks ago, its soccer launches tied to the World Cup, and its introduction of the Nike Plus GPS running app.
Denson also noted that two new Nike stores opened in Santa Monica and Roosevelt Field “are great examples of where we see the retail evolution headed, a balance of innovative product, strong brand and category passion, from the best performance product you can find anywhere to lifestyle footwear and apparel you can wear any time.” At the same time, he said its partnerships with retailers mentioning Foot Locker's House of Hoops, Finish Line's Running Lab and Dick's SG's Fieldhouse concept- “have quickly become meaningful and measurable formats that expand the overall market.” Similar partnerships are being pursued with international retail partners.
Citing the robust backlogs, Denson indicated that Nike was scrambling to meet demand for certain technical footwear and performance apparel products.
“We're working closely with all our manufacturing partners to accelerate production and meet demand on these highly sought after products,” said Denson. “But all things being equal, we prefer a full market and we're seeing that enthusiasm play out across categories and geographies.”
For its fiscal second quarter, Nike expects revenue growth slightly below reported futures growth, reflecting the timing of orders. Due to increasing pressure from FX headwinds, rising input costs and higher freight costs, NKE now expects full fiscal year gross margins to come in about 50 basis points below the prior year with relatively flat margins in Q2 and “more challenging comparisons” in the second half as macro pressures increase and they begin to anniversary higher margins in the prior year. Marketing investments are expected to increase at a low-single-digit rate in Q2 while overhead is expected to increase in the low-double-digit rate due to increased investment in the direct-to-consumer business and the timing of stock option expenses.
