Nike Inc. Tempered Outlook Sparks Concerns

Fiscal fourth quarter earnings reached $521.9 million, or $1.06 per share, compared with $341.4 million, or 70 cents, in the year-ago period. Excluding a $145 million after-tax restructuring charge taken in the year-ago period for the impairment of Umbro assets and other restructuring activities, earnings increased 7% for the quarter. Revenue rose 7.7% to $5.08 billion. Excluding changes in currency exchange rates, fiscal Q4 revenues increased 4%.  Excluding currency changes, fourth quarter revenues grew 3% for the combined Nike/Jordan brands and increased 6% for the “Other” business, which includes Cole Haan, Converse, Hurley, NIKE Golf and Umbro.

For the full year, sales dipped 0.8% to $19.0 billion. Revenues for the combined Nike/Jordan brands were down 2% for the year on a currency-neutral basis, reflecting mid-single digit declines across four of the company's seven key categories. The growth categories were football (soccer) and basketball – each growing at a low-single digit rate, and action sports, which was up in the high teens for the year. Revenue from the Direct-to-Consumer segment — NKE’s owned-retail stores and online business — increased 12% in the year to nearly $2.5 billion. Online sales gained 25% for the year to over $260 million with NIKEID surpassing $100 million for the first time.

By category for the Nike brand, footwear grew 6.6% in the fourth quarter to $2.75 billion on a reported basis and 2% currency-neutral. Apparel jumped 13.0% to $1.32 billion and increased 8% in constant currencies. Equipment declined 1.0% to $258.9 million, or down 6% on a currency-neutral basis. Nike/Jordan brand futures for apparel and footwear through November 2010 increased 10% on a currency-neutral basis as all seven key categories and every region except Japan saw growth. On a reported basis, futures grew 7%, reflecting weaker currencies in Europe.

 

Company president and CEO Mark Parker said the full year sales slide hides “tremendous momentum” seen in the back half of the year. “In most key markets around the world, our business has strengthened while our major competitors weakened. And that's a trend we intend to accelerate,” said Parker.

 

 

In the North America region, revenue increased 3.8% to $1.8 billion, including a 1% currency benefit. Direct-to-Consumer revenues increased 19%. Online sales increased 27% and comps for Nike-owned stores jumped 17%, driven by higher traffic, conversion rates and average dollars per transaction. Wholesale revenues increased 2%, driven primarily by renewed strength in apparel, which grew in double digits.

By category, footwear revenue in North America inched up 1.3% to $1.2 billion, driven by a 2% increase in inline sales, partially offset by a 27% drop in off-price revenues. The inline revenue improvement was primarily due to double-digit growth in running, football (soccer) and men's training, as most other categories were down in single digits. Don Blair, Nike's VP and CFO, said the running category “has been particularly rapid, as product innovations such as Lunarlon and Free fuel consumer and retailer excitement.”

Apparel revenues jumped 12.5% to $447 million in North America, or 12% on a currency-neutral basis. Blair said apparel is benefiting from efforts over the last two years “to position this business for profitable growth.” Inline revenue grew nearly 30%, while close-out revenues declined over 50%.  Apparel futures for the next six months grew at a mid teens rate, with all seven key categories trending higher. Equipment revenue was essentially flat.

Overall, North America futures for the combined Nike/Jordan brands were up 8% overall and ahead 7% on a currency-neutral basis. Fourth quarter EBIT for North America improved 8.1% to $434.6 million as higher gross margins more than offset increased investment in demand creation.

Charlie Denson, president of the Nike brand, said the resumption of growth in the second half in the North American region – as well as its 8% EBIT gain for the year – is “a clear indicator of managing the business well.”

In Western Europe, revenue increased 2.0% to $956.0 million, but declined 2% excluding currency effects. Footwear revenue inched up 0.5% to $593.1 million, apparel revenue was up 8.2% to $309.0 million and equipment declined 11.9% to $53.9 million. On a constant-dollar basis, footwear was down 4%, while apparel grew 3%, driven by the impact of the World Cup. EBIT for Western Europe decreased 17.3% to $192.6 million as higher investments in demand creation more than offset higher revenues and higher gross margins. Currency-neutral futures grew 11%, powered by strong growth across multiple categories.

Central and Eastern Europe revenue increased 9.0% to $331.9 million but declined 3% excluding currency effects. Footwear increased 9.1% to $198.8 million, apparel revenue grew 10.5% to $108.5 million and equipment improved 2.1% to $24.6 million. EBIT for Central and Eastern Europe decreased 9.4% to $84.3 million, with revenue growth more than offset by lower gross margins and World Cup marketing. Futures were up 3% on a constant-currency basis. Blair said Nike is “beginning to see signs of stabilization in these markets as a result of improving macroeconomic conditions, increasing brand momentum and tight management of inventory in the market.”

 

Japan Region the Only Decliner in Q4…

In Greater China, revenue grew 12.3% to $464.4 million on both a reported and currency-neutral basis in fiscal Q4, driven by new points of distribution and comp growth. Footwear revenue increased 13.7% to $246.4 million, apparel was up 10.0% to $192.6 million and equipment improved 16.5% to $25.4 million. Robust expansion of sportswear, football and action sports fueled the growth. EBIT for Greater China increased 20.2% to $187.0 million as revenue growth and higher gross margins more than offset increased demand creation investments. Constant-currency futures orders for the next six months grew 16% over the prior year. Said Denson, “In China, our business is accelerating.”

Japan's fourth quarter revenue declined 7.7% to $260.6 million for the NIKE brand. Footwear revenue was down 0.5% to $128.9 million, apparel was down 12.9% at $105.1 million and equipment dropped 16.9% to $26.6 million. EBIT declined 6.5% to $60.8 million. Blair said, “Our gross margins are up significantly, both inventories and accounts receivable are in great shape, and we're much healthier than our competitors in Japan.” But Japan's futures were down 16% currency-neutral as Denson called the region “a very tough market.”

In the Emerging Markets, revenue was up 47.2% to $556.0 million and 28% on a constant-dollar basis. Footwear revenue increased 42.3% to $354.8 million, apparel rose 69.8% to $162.3 million and equipment increased 19.3% to $38.9 million. Excluding currency effects, nearly every territory and category grew double digits, with Brazil and football leading the way. Revenues in Brazil grew 74%, driven by football, athletic training, sportswear and action sports. Across the region, football revenues grew over 60%. EBIT for the Emerging Markets region improved 46.0% to $113.6 million for the quarter. Futures were up 30% on a constant currency basis.

Revenue for “Other” business increased 8.5% in Q4 to $714.0 million and 6% excluding currency effects. EBIT improved 71% to $73 million, reflecting strong gross margin expansion. For the full year, revenues in its Other businesses increased 4.6% to $2.53 billion.

Converse revenues grew 4% in Q4, pushing full-year revenues up 7% to $983 million. Hurley delivered 9% growth for the year to reach revenues of $221 million. Umbro's Q4 revenues soared 57%, increasing full-year revenues 29% to $224 million. Both Nike Golf and Cole Haan “struggled” in the first half of the year, but returned to growth in the second half. For the full year, revenues for both NIKE Golf and Cole Haan declined 2% to reach $638 million and $464 million, respectively.

Highlighting growth categories, Denson raved about the company's success in soccer, which was up 39% in Q4. Football futures were up double-digits, “indicating a strong momentum well past the World Cup event.”

 

Mr. Denson noted that nearly half the players in the World Cup are wearing Nike footwear, almost 50% more than its nearest competitor. He also credited the widespread attention to its Write the Future advertising campaign and in-store experiences such as the NIKE Boot Room.

In running, Denson pointed to the strong reception to its LunarGlide model and the Dynamic Support technology, and also believes “brand experiences” like The Human Race and nikeplus.com is driving running participation globally. In basketball, the four-day World Basketball Festival in New York City set for August is expected to create opportunities for its Nike, Jordan and Converse brands.

 

Similarly, Nike, Converse and Hurley will all be co-sponsoring the U.S. Open of Surfing in Huntington Beach in early  August. In training, efforts around innovation and consumer experiences is “starting to reignite” the category in both men's and women's. Nike's Pro Combat first layer product was up 50% for Q4, with half purchased by women. The Women's Trainer 1 is seeing strong double-digit increases in futures for North America in both footwear and apparel for holiday. 

 
Prompted by concerns that Nike has missed the toning phenomenon, Denson said the women's training category could tap into the toning trend.  “We really do believe in our Free concept, and we believe it is a great solution and provides great benefits to the consumer,” said Denson. “And then you will see an accelerated introduction into spring and summer as we continue to capture more and more of that female consumer.”

But Denson sees momentum across several footwear categories. “When you look at it over the next nine to 12 months, we are very bullish not only in running but in basketball, in soccer. And now that the training product is really starting to come forward, both in men's and women's, we really like the overall portfolio of performance,” Denson said.

Parker also said Nike's efforts at improving in-store experiences, not only with Nike-owned retail stores in Harajuku and Beijing but also with its multi-branded Action Sports stores in Southern California, “House of Hoops” locations at Foot Locker, “Field House” in-stores shops at Dick's SG and “The Running Lab” with Finish Line.

Overall company gross margins grew 400 basis points to 47.4% of sales in Q4 from 43.4% due to improved in-line product margins, fewer close-out sales, and growth and improved profitability of owned retail and Other businesses.

 

The growth in Nike brand gross margin was said to be driven by favorable product mix, cost reduction initiatives and lower input costs, as well as the positive impact of clean inventories on off-price volumes and discounts. Sales growth and stronger profitability in the Direct-to-Consumer operations also had a positive impact on Nike brand gross margins.  Fourth quarter SG&A expenses expanded 460 basis points to 34.1% of sales, mainly due to higher demand creation spending, which increased 43% to $666 million around World Cup marketing. Operational overhead spending rose 16% to $1.1 billion, reflecting investments in company owned retail and higher costs for performance-based compensation.

For fiscal 2011, revenue, excluding currency effects, are projected to bounce back to show a rise in the high-single digits. But Blair said currency changes and input cost inflation “will put significant pressure on our reported top- and bottom-line results for fiscal 2011.” Gross margins “could be as much as 1 point below” this past year, with as much as 0.5 points of decline in Q1 due to the stronger dollar and rising costs for product components such as oil, labor and freight. Marketing costs are expected to grow slightly slower than revenue, with spending weighted toward Q1 in support of key events such as the World Cup and the World Basketball Festival. Operating overhead is expected to grow at a mid-single-digit rate.