Benefiting from meatier margins, lower expenses, and robust growth in North America and Europe, Nike Inc. reported earnings jumped 37.6 percent in its first quarter ended Aug. 31, to $780 million, or 86 cents a share, exceeding Wall Street’s consensus estimate of 78 cents.
Revenues rose 7.7 percent to $6.97 billion and climbed 10 percent on a currency-neutral (C-N) basis.
Revenue for Nike Brand, which now also includes Nike Golf and Hurley, increased 7 percent on a C-N basis, led by Running, Basketball and Global Football (soccer) categories. Nike Brand futures orders accelerated to 10 percent growth on a C-N basis, led by double-digit growth in North America and both European geographies. Converse’s C-N revenues increased 16 percent.
“These are outstanding results and they demonstrate our ability to grow and, more specifically, that Nike is able to generate profitable, sustainable growth,” said Mark Parker, Nike Inc.’s president and CEO, on a conference call with analysts.
Parker attributed Nike’s ongoing success to a focus on innovation. The Nike Free Flyknit has seen a “strong response” from runners with “tremendous” potential as it rolls out while the Hypervenom football boot was the most successful boot launch in Nike history. Extended offerings of Dri-FIT Knit helped accelerate Nike Brand’s premium apparel side while the new Nike Tech Pack fleece is “quickly becoming the go-to product” on the Sportswear side.
He also said the company’s wide reach of the Nike Brand across geographies and categories as well as the continued strength at Converse helps the company “manage risk and deliver growth even when there's variability in the results of any of the individual components.” The one shortfall was China, which saw a modest sales decline for Nike Brand although progress is being seen at remerchandised stores.
Finally, Parker credited Nike’s marketing machine and its more recent success reaching consumers through digital means and through key events. As an example, he cited the success Nike is having reaching runners and driving running participation in Russia with Run Moscow and other Nike We Run events there. Said Parker, “It's really no coincidence that we see our revenues in futures growing at double-digit pace in Russia, quickly gaining share and growing the market. These are the kind of connections that excite us, our consumers, and ultimately serve as building blocks to grow our business.”
The Nike Brand’s 10 percent futures gain reflected a 7 percent increase in units and a 3 percent increase in average selling price. Weaker foreign currencies reduced reported futures growth to 8 percent.
On a reported basis, Nike Brand sales were up 6.6 percent to $6.5 million. Operating profits for Nike Brand jumped 27.0 percent to $1.1 billion.
By category for the Nike Brand segment on a C-N basis, Footwear led the gains, up 8 percent; followed by Apparel, ahead 6 percent, and Equipment, up 5 percent. On a reported basis, Footwear grew 7.2 percent to $3.98 billion; Apparel, 5.9 percent to $2.02 billion; and Equipment, 4.1 percent to $434 million.
Revenue for Nike Brand was higher in every geography except China with European geographies leading the way with accelerated growth in revenues and futures. Nike brand DTC revenue increased 18 percent for the quarter, with comp growth up 9 percent and online sales ahead 12 percent.
In the North America region, revenues for Nike Brand grew 9.4 percent to $3.14 billion. Footwear advanced 9.1 percent to $1.9 billion, Apparel increased 9.2 percent to $1.0 billion, and Equipment gained 12.7 percent to $222 million. DTC revenues grew 12 percent in the quarter, driven by 5 percent comp store sales growth.
EBITDA gained 26.0 percent to $813 million, due to strong revenue growth, gross margin expansion and SG&A leverage. Futures were up 11 percent on a recorded basis and 12 percent on C-N basis.
The gains in North America were driven by growth across all key categories except Golf, including double-digit growth in Basketball, Running and Men's Training.
“We continue to grow in North America because of our focus on leveraging an integrated, yet differentiated, marketplace as we consistently work to provide unique consumer experiences across wholesale, DTC and online,” said Trevor Edwards, how recently replaced the retired Charlie Denson as president, Nike Brand. “We are able to expand both the market and our share. This integrated approach ensures we continue to maintain a strong pull market and drive profitability.”
As a highlight, Edwards noted how Nike Training Club, a mobile app for women, has logged 10 million downloads and delivers 600,000 workouts every week. Said Edwards, “This virtual club creates a community of women who work out with us every single day.”
The Training Club initiative inspired a new women’s retail concept with personal stylists, fitting room services, in-store studios, and running and training events.
In Western Europe, revenues on a C-N basis grew 8 percent, driven by a 12 percent footwear gain. Apparel inched up 1 percent and Equipment declined 3 percent. On a reported basis, sales grew 10.6 percent to $1.3 billion. Sales increased 16 percent to $829 million in Footwear, 3 percent to $399 million in Apparel, and 1 percent to $73 million in Equipment.
EBITDA rose 25.0 percent to $265 million, driven by revenue growth and lower marketing costs, partially offset by gross margin compression driven primarily by FX. Futures were up 12 percent on both a reported and C-N basis.
The gains in Western Europe came despite tough comparisons against the London Olympics and the European championships, as well as the ongoing macroeconomic weakness in the region. Edwards said the gains reflect a decision made about 18 months ago to reorganize the region to drive “a more centralized and consistent consumer experience across the geography and elevate the distribution strategies,” similar to North America. The increases were led by double-digit growth in two of its largest territories, the UK and AGS (Austria, Germany and Switzerland.) That helped offset macroeconomic challenges that impacted results in the southern territories.
In Greater China, total C-N sales were down 3 percent as growth in Sportswear and Basketball was offset by declines in other categories.
Declines of 7 percent in Footwear and 11 percent in Equipment offset a 6 percent gain in Apparel. On a recorded basis, total sales were down 0.5 percent to $574 million. Footwear gave back 4.5 percent to $341 million; Apparel grew 9.9 percent to $197 million while Equipment was down 7.7 percent to $36 million. EBITDA increased 3.0 percent to $170 million due to gross margin expansion and lower marketing spending, largely offset by DTC investments.
Edwards said Nike Brand’s wholesale comp performance in China “slowed” in the quarter but its retail partner doors that have been retrofitted with more focused assortments are performing well and Nike DTC comp’s grew over 20 percent.
The reset in China is being led by better differentiating its point of distribution, better tailoring assortments to local tastes, and improving delivery timing. Said Edwards, “We continue to be aggressive and take decisive action to reset this market, but we'll do it the right way, creating a foundation for long-term sustainable and profitable growth.”
Futures in China were ahead 3 percent on a recorded basis and 2 percent on a C-N basis. Revenue is expected to grow in China in Q2, with overall FY14 revenues projected to be roughly in line with the prior year.
In Central Europe, C-N sales increased 10 percent, with gains of 13 percent in Footwear, 6 percent in Apparel, and 14 percent in Equipment. Gains were led by double-digit growth in Russia, Turkey, and Poland. Football, Running and Basketball grew at double-digit rates.
Recorded sales in Central and Eastern Europe rose 11.9 percent to $366 million. Footwear jumped 14.9 percent to $193 million, Apparel increased 7.8 percent to $139 million, and Equipment advanced 13.3 percent to $34 million. Operating earnings jumped 50.0 percent to $81 million and EBIT increased 50 percent, driven by revenue growth, gross margin expansion and lower marketing spend.
In Japan, revenues on a CN basis inched up 1 percent with a 2 percent gain in Footwear and 1 percent gain in Equipment. Apparel slipped 1 percent. The gains were driven by double-digit revenue growth in Football and Basketball, offset by declines in Running, Nike Sportswear and Men's and Women's Training.
On a recorded basis, Japan revenues were down 19.8 percent to $158 million with declines of 18.5 percent in Footwear, to $88 million, 20.9 percent to $53 million in Apparel, and 22.7 percent to $17 million in Equipment. Operating profits were ahead 4.3 percent to $24 million with the help of lower SG&A spending and gross margin expansion. Futures were down 19 percent on a reported basis but inched up 1 percent C-N.
In Emerging Markets, C-N revenues were up 5 percent. Strong growth in Brazil and Argentina offset weaker results in Korea and, more prominently, in Mexico, where shipping delays caused by a distribution center transition reduced revenue. Excluding the impact of the shipping disruption in Mexico, Emerging Markets revenue would have increased at a double-digit rate.
Sales on a C-N basis grew 5 percent in Footwear and 6 percent in Apparel while sliding 6 percent in Equipment. On a reported basis, sales were up 0.5 percent to $902 million. Footwear inched up 1.1 percent to $624 million. Apparel increased 1.3 percent to $226 million. Equipment fell 8.8 percent to $52 million. EBITDA was down 5.0 percent to $201 million due largely to FX headwinds and higher operating overhead, partially offset by lower marketing spending. Futures in the Emerging Markets were up 7 percent C-N and 1 percent on a reported basis.
Highlighting category performance globally, Edwards said Running saw its 15th consecutive quarter of double-digit gains, with broad-based growth in Footwear and Apparel as well as Men's and Women's in North America and internationally. Future orders for Running are up double digits.
He said the category is benefiting from a strong response to launches, citing Nike Free Flyknit, LunarGlide 5 and the Pegasus 30 in footwear, as well as Dri-FIT Knit on the apparel side. Its outreach efforts such as its Nike running Clubs and Nike+, which is adding 100,000 new runners per week, is also helping. At retail, its running-specific doors, including one in the Flatiron district in New York City and Covent Gardens in London, are seeing a “strong performance,” and its Track Club at Finish Line is “significantly” outpacing Finish Line’s other locations.
Global Football (soccer) grew double-digits in the quarter despite tough comparisons against the European championship, with futures up double digits. Edwards said the Hypervenom boot is already the number two selling boot behind Nike’s Mercurial Vapor IX.
“You can expect to see us bring more amazing innovations, connect more powerfully with our consumers, and drive more energy into the market as we head into the World Cup in Brazil, and well beyond,” said Edwards.
Converse’s 16 percent gain on a C-N basis was driven by strong results in the US and UK. Reported sales for Converse jumped 18.2 percent to $494 million. EBITDA grew 36.3 percent to $169 million, driven by higher revenue and gross margin expansion due to a shift in mix to higher margin territories and products.
“Converse is a brand that has been bringing energy and style to consumers for many years, and the opportunities ahead are even greater,” said Parker. “We continue to diversify the Converse portfolio, expand the brand's reach with new market conversions, grow the DTC business, and unlock growth in apparel. I see tremendous long-term growth potential for the Converse brand.”
Companywide, gross margins improved to 44.9 percent from 43.7 percent, driven by lower raw material costs, a mix shift to higher-margin products, higher average prices and lower discounts, as well as growth in its DTC business and Converse. These upsides were partially offset by higher labor costs and FX headwinds, due largely to weaker emerging market currencies.
SG&A expenses were reduced to 29.5 percent from 31.8 percent a year ago, helped by the absence of heavy investments in the prior year to support the European championships, Olympics and product launches. Operating overhead grew 12 percent due to continued investments to support growth initiatives, particularly digital and DTC.
The bottom line also benefited from a reduction in its income tax rate to 25.0 percent from 26.9 percent due primarily to a lower effective tax rate on operations outside the U.S.
For the fiscal year, Nike still expects EPS to grow at a low-double-digit rate, although currency headwinds are expected to put pressure on reported results. Revenue for the second quarter and full fiscal year are expected to grow at a high single-digit rate, reflecting FX headwinds. On a reported basis, this is slightly below earlier expectations but Q1 gross margin performance exceeded expectations. Said Don Blair, Nike’s CFO, “We continue to increase average selling prices by strengthening the premium segments of our business and by taking selective price increases around the world, and we're expanding our high margin DTC business.”
For the second quarter, gross margin is expected to expand about 50 basis points, driven by continued benefits from higher average prices, easing raw material costs, and growth in DTC, partially offset by higher discounts to clear inventories in Mexico, startup costs for its expanded US distribution center, and the FX headwinds. For the fiscal year, gross margins are expected to expand approximately 50 basis points, a modest increase from prior guidance.
