Nike Inc. on Tuesday reported diluted earnings per share for the fiscal third quarter ended February 29 of 53 cents, which was in-line with Wall Street’s expectations. Adjusted EPS of 78 cents beat by 22 cents.
Revenues rose 5 percent on a reported basis and 7 percent on a currency-neutral basis to $10.1 billion, ahead of estimates by $530 million. Digital sales were up 36 percent versus the prior year, while inventory increased 7 percent to $5.8 billion.
COVID-19 primarily affected Nike in China during the period due to store closures throughout the country. The company will provide an update on the coronavirus’ impact on operations elsewhere in the world during Tuesday afternoon’s earnings call.
Revenue increase was driven by 13 percent currency-neutral growth in Nike Direct with digital growth of 36 percent and strong growth across EMEA, APLA and North America, offset by the impact of COVID-19 on its business in Greater China. Digital sales in Greater China increased more than 30 percent while brick & mortar retail sales were impacted by temporary store closures related to COVID-19.
“In an extraordinarily dynamic time, Nike’s strong results are a testament to our deep consumer connections, compelling product innovation and agile teams around the world. We know it’s in times like these that strong brands get even stronger,” said John Donahoe, president and CEO, Nike Inc. “As we start to see recovery in China, no one is better equipped than Nike to navigate the current climate.”
Diluted earnings per share for the quarter were 53 cents, including a 25 cent non-recurring, non-cash charge related to its entry into definitive agreements to transition its Brazil, Argentina, Chile and Uruguay businesses to a strategic distributor model. Diluted earnings per share were also adversely impacted by COVID-19.
“As we close Q3, Nike’s Brand leadership and business momentum have been stronger than ever and unrivaled around the world,” said Andy Campion, Executive Vice President and Chief Financial Officer, Nike Inc. “Amidst the dynamics that all are facing, we are executing against an operational playbook that will expedite Nike’s return to profitable, capital-efficient growth leveraging our strong financial position, the strongest partnerships across the value chain in our industry and our leading digital capabilities.”
As discussed in its press release issued on February 4, 2020, operations in Greater China were materially impacted as a result of COVID-19. In the third quarter, on a currency-neutral basis, Greater China revenues were down 4 percent following 22 consecutive quarters of double-digit growth. However, during the first two months of the third quarter, Greater China’s revenue grew strong double-digits, offset by the impacts of COVID-19 beginning in late January. At the peak in February, roughly 75 percent of Nike-owned and partner doors in Greater China were closed with others operating on reduced hours. Currently, nearly 80 percent of doors are open in Greater China with an even higher rate in key cities. Beginning March 16, all Nike-owned stores, outside of Greater China, Japan and Korea were closed to help curb the spread of COVID-19.
Nike Inc. management will provide more detail on the financial and operational impacts of COVID-19 during its next conference call.
Non-Recurring Items Impacting Comparability In The Third Quarter
Third-quarter results contain several non-comparable transactions. In February, Nike announced the execution of agreements to transition its Nike Brand businesses in Brazil, Argentina, Chile and Uruguay to strategic distributor partnerships. As a result, Nike classified the assets and liabilities of the entities to be sold as held-for-sale on its Unaudited Consolidated Balance Sheets and recognized a non-recurring, non-cash charge of $400 million. This charge primarily reflects the anticipated release of associated cumulative foreign currency translation losses and could fluctuate due to changes in exchange rates up to the date of close. Additionally, Nike completed the sale of the Hurley brand and recognized an immaterial gain on the sale. Both the Hurley gain on sale and the charge associated with the transition in South America were recognized in Other (income) expense, net on its Unaudited Consolidated Statements of Income. As a result of the sale of the Hurley business, the Company estimates that revenue growth in North America was adversely impacted by approximately 1-to-2 percentage points during the third quarter.
Third Quarter Income Statement Review
- Revenues for Nike Inc. increased 5 percent to $10.1 billion, up 7 percent on a currency-neutral basis.
- Revenues for the Nike Brand were $9.6 billion, up 6 percent on a currency-neutral basis driven by double-digit growth in Nike Direct and growth in wholesale; key categories including Sportswear and the Jordan Brand, and continued growth across footwear and apparel; and
- Revenues for Converse were $506 million, up 11 percent on a currency-neutral basis, mainly driven by double-digit growth in Europe and in digital, globally.
- Gross Margin decreased 80 basis points to 44.3 percent primarily as a result of impacts from COVID-19, including a lower mix of sales in Greater China which is its highest margin geography, as well as increased rebates to wholesale partners and higher costs related to factory cancellations to manage future inventory. Gross margin also declined due to changes in foreign exchange rates and incremental tariffs in North America.
- Selling and Administrative Expenses increased 6 percent to $3.3 billion. Demand creation expense was $870 million, up 1 percent due primarily to investments in key brand moments. Operating overhead expense increased 8 percent to $2.4 billion driven by wage-related expenses which reflect investments in data and analytics and other transformational initiatives to accelerate its end-to-end digital transformation.
- Other (Income) Expenses Net was $297 million comprised primarily of a non-recurring, non-cash charge of $400 million related to the execution of agreements to transition the Company’s operating models in Brazil, Argentina, Chile and Uruguay. This charge largely reflects the anticipated release of associated cumulative foreign currency translation losses.
- Effective tax rate was 3.9 percent compared to 14.7 percent for the same period last year due to a shift in the proportion of earnings taxed in the U.S., and increased benefits from discrete items.
- Net income decreased 23 percent to $847 million
- Diluted Earnings Per Share decreased 22 percent to $0.53 as strong revenue growth in Nike Direct and across EMEA, APLA and North America were offset primarily by the aforementioned non-recurring charge and the impacts to Greater China from COVID-19.
February 29, 2020 Balance Sheet Review
- Inventories for Nike Inc. were $5.8 billion, up 7 percent compared to the prior-year period, reflecting anticipated strong demand across all geographies as well as higher inventories in Greater China due to COVID-19. APLA inventory declined due to the reclassification of inventory in Brazil, Argentina, Chile and Uruguay into Prepaid expenses and other current assets as a result of the aforementioned transaction.
- Cash and equivalents and short-term investments were $3.2 billion, $864 million lower than last year as share repurchases, dividends and investments in infrastructure more than offset proceeds from net income.
Photo courtesy Nike