NIKE, Inc. moved their traditional quarterly earnings release date up a few days to accommodate the company’s annual meeting on Monday, a move a number of analysts applauded for its timing and content. Company management was again almost giddy with excitement as Nike reported a fiscal first quarter that has the company hitting on all cylinders.

“We're off to a great start,” said company chairman and CEO Phil Knight, a motion that was seconded by his management team. The other overall theme was balance as they talked about the brand portfolio and their distribution strategy.

Revenue for the quarter, which approached the $3.6 billion mark, was aided in part by changes in foreign currency exchange rates, which accounted for about 3 points of growth, while the acquisition of Converse added another 4 points to consolidated revenue growth for the quarter.
The acquisition of Converse , which will become less of a growth contributor as it reaches its anniversary date in early September, accounted for about 9 points of consolidated earnings per share growth.

Worldwide retail sales were a “little over 10%” of total revenue.

The impact of the Starter acquisition on was said to be “negligible”. They said the addition of Starter to the brand portfolio enables them to gain experience in the value segment with an established and reputable brand name, and “serves as a platform for further development of this space.” They also said that it takes pressure off of any Converse strategy for the value channel and helps preserve the integrity of Nike as a premium brand.

Nike management said they are seeing “strong results across all major channels of distribution” for the Back-to-School period. They said female consumers, in particular, have embraced the new “Shox for Her” footwear concept and product. They also said branded athletic apparel had some “strong momentum” and that a trend to higher average prices in footwear shows “continued momentum”.

First quarter revenues for the EMEA region grew 14.2% to $1.16 billion versus $1.01 billion in the year-ago period, still reporting a 9.2% increase in currency-neutral terms for the period. Management said that revenues were “somewhat better” than expected due to certain orders that shipped in August that would have normally shipped in September.

Footwear revenues, which increased more than 12%, benefited from strong sales in the U.K., Italy, and emerging markets in Central Europe, Turkey, Russia, and Greece that more than offset weakness in France, Germany, and Iberia. NKE still sees the growth trend here in the mid-single-digit range in constant dollar terms. Apparel saw an upside from summer sporting events like the Olympics, but also got a boost from new Soccer kit launches for Arsenal and Man United.

Pre-tax profits for the region, which includes the Middle East and Africa, were up 21.5% for the quarter to $246.4 million. Gross margin for the European region improved 180 basis points for the period, accounting for 60 basis points of overall NKE margin improvement.

Futures backlog at the end of the period was up 6.0% in current dollars, but was up 3.0% on a constant dollar basis.

In Asia Pacific, revenues in China “nearly doubled”, while Japan sales were up in double-digits. Asia Pacific revenues increased 16.6% to $406.0 million in the first quarter, and were up roughly 12% on a currency-neutral basis. However, pre-tax profit was down 17% for the period to $63.4 million for the quarter. Gross margins improved 230 basis points, delivering 30 basis points of the consolidated GM gain.

The hit to the pre-tax line came as the company grew SG&A spending by more than 50% as they over-invest in demand creation in China and the lead up to the 2008 Olympics in Bejing. Profits were also impacted by the implementation of new supply chain systems in Japan and Southeast Asia.
Futures backlog for Asia Pacific at quarter-end was up 17%, or up 17.5% in currency-neutral terms.

The Americas were said to have performed “pretty much as expected” in the quarter, posting a 6.6% revenue increase to $161.7 million, or a 10% gain when measured in local currencies. Pre-tax income was down 14.8% to $20.7 million in the quarter, no doubt impacted by a 170 basis point decline in gross margin for the period. Heavy demand creation investment was also cited as a culprit.
Futures backlog was up 6% in the Americas at quarter-end, or up 11% in currency-neutral terms.

Management said that the U.S. region started the year with a “banner quarter” which saw Foot Locker and Footaction contribute about two points of the 11.8% revenue growth for the period. They said the U.S. market is a great example of how the alignment of all tools in the company toolbox is “really paying off”. They cite the solid alignment of product, marketing, retail, and sales has the market “hitting on all cylinders”.

At U.S. Owned-Retail, NikeTown stores posted a 9% comp store sales gain, but the Factory Direct stores were said to see “less robust” growth due to a shortfall of excess inventory in the system.

Pre-tax income in the U.S. rose 9.7% in the period to $321.9 million, a gain that was tempered by “heavier demand creation investments”. U.S. region gross margins improved 50 basis points for the quarter, due primarily to improvements in the Footwear category, which saw a combination of higher in-line margins and fewer, more profitable close-out sales.

In the “Other” category, Converse accounted for roughly 75%, or approximately $127 million, of the 63.8% increase in revenues for the period. Cole Haan was also said to have “robust growth”.

Management said that the Olympics campaign was a tremendous success “by almost any metric”, suggesting that the exposure had given the brand “additional heat” and “strong momentum” for the business. They said the Olympics have always been a boost to the business, indicating that sales have grown 35% since the Sydney Olympics in 2000.

FX rate fluctuations accounted for 2% of the 23% increase in SG&A and Converse added another three points to the increase.

The acquisition of Converse and FX rate changes together accounted for about 7 points of the inventory growth at quarter-end. Inventory in the U.S. was down 9% at the end of the period. In the accounts receivable line, stronger foreign currencies and the acquisition of Converse together accounted for all of the growth.

Nike said it was targeting high-single-digit revenue growth for the full year, a tempering of recent gains due in large part to the anniversary of the Converse acquisition, as well as the higher numbers in the second half of fiscal 2004. However, NKE sees a “slightly greater” increase in gross margin in the second and third quarters when the year-over-year improvement in hedge rates will be most significant.

The company expects that better foreign hedge rates will enable them to be more competitive in Europe and Asia, as well as helping grow the overall gross margin percentage for the year. The smallest year-over-year gross margin growth is expected to be seen in Q4, as they already experiencing better foreign exchange rates in the fourth quarter of fiscal 2004.


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