Nike Inc. surprised some investors by reporting lower-than-expected sales for its fiscal fourth quarter, ended May 31, despite barely beating expectations on earnings, as it was impacted in North America by tough year-ago comparisons due to last year’s West Coast port slowdown as well as the need to clean up excess inventories in the marketplace.
Several analysts lowered their price targets following the news, but most held off on a full downgrade as Nike management shared more upbeat sentiments on the company’s June 28 conference call. While some felt Nike may be feeling pressure in its home market with recent gains from Under Armour and Adidas, Nike officials predicted that sales growth would resume in the current quarter and accelerate in the rest of its new fiscal year.
“We continue to see strong underlying momentum in the fundamentals that drive our growth and profitability,” said Mark Parker, Nike Inc.’s president and CEO, of the North America region on the conference call with analysts. He pointed out that backlogs for delivery from June through November were up 6 percent in North America. Moreover, sales at Nike.com were up 39 percent for its full fiscal year and grew even faster in the fourth quarter.
“We continue to feel great about where we’re going in terms of the transformation of that marketplace, including through Nike.com, as well as through the relationship with our strategic wholesale partners,” Parker said.
Trevor Edwards, president Nike Brand, further noted that the future growth in North America is being led by key growth categories – mentioning sportswear, Jordan Brand, running and global football (soccer). The brand is also seeing “great energy in North America” around basketball and expects the category to regain momentum in the coming year.
“The consumer demand in the marketplace and the consumer’s connection with the brand continues to be very strong, and we feel confident about the pipeline of products that we have coming through,” Edwards said.
Overall, Nike Inc.’s earnings slid 2.2 percent in the quarter to $846 million, compared to a year ago, as revenue growth was more than offset by lower gross margins, higher selling and administrative expense and a higher tax rate. Earnings per share were flat at 49 cents due to lower shares and came in ahead of Wall Street’s consensus estimate of 48 cents.
Revenues for Nike Inc. climbed 6 percent to $8.2 billion and gained 9 percent on a currency-neutral basis. The gains were driven by double-digit growth in Western Europe, Greater China, Emerging Markets and Japan, including strong growth in sportswear, global football and Jordan Brand. Sales still fell short of Wall Street’s consensus target of $8.3 billion.
Nike Brand futures at the quarter’s end were ahead 8 percent on a reported basis and 11 percent currency-neutral.
While shares initially were down in after-market trading due to concerns over sales growth as well as futures coming in lighter than some expected, Nike’s stock wound up gaining ground in trading on Wednesday as management reassured the investment community about its underlying growth prospects, including in North America.
Overall, total Nike Brand sales grew 8 percent in the quarter on a currency-neutral basis (4.6 percent reported), to $7.73 billion. Footwear expanded 9 percent on a currency-neutral basis (6.3 percent reported), to $5.1 billion, apparel gained 7 percent on a currency-neutral basis (3.9 percent reported) to $2.24 billion, and equipment was down 3 percent on a currency-neutral basis (5.8 percent reported), to $391 million. Nike Brand’s EBIT (earnings before interest and taxes) was off 8.3 percent to $1.7 billion.
By region, sales in North America in the quarter were flat at $3.74 billion, due in part to an unfavorable comparison to the timing of shipments across the third and fourth quarters of its 2015 fiscal year.
“Many of the orders planned for shipment in Q3 of fiscal-year 2015 were delayed due to the West Coast port congestion, and instead shipped in Q4,” said Andy Campion, Nike’s CFO. “Excluding the impact of this timing shift, we estimate Q4 full-year 2016 North America revenue growth would have been in the mid-single-digit range.”
Footwear sales were up 2.2 percent in the quarter to $2.37 billion while apparel sales were down 2 percent to $1.16 billion. Equipment sales slumped 10.1 percent to $205 million. Operating profits were off 11.7 percent to $936 million in part due to efforts to clear excess inventories in the region that had been noted in the last two quarters.
For the full year, sales in North America grew 7.5 percent to $14.8 billion and 8 percent on a currency-neutral basis. Growth was led by sportswear, Jordan and running. Growth also reflected continued momentum in its direct-to-consumer (DTC) business, led by Nike.com growing at 39 percent. North America EBIT increased 3 percent for the full year, as revenue growth and full-price gross margin expansion were mostly offset by the lower off-price margin associated with clearing excess inventory.
“We continued to work more closely with our key wholesale partners such as Dick’s Sporting Goods and Foot Locker to deliver compelling retail experiences for our consumers, and our DTC business also had another strong year, up 17 percent,” Edwards, said. Nike officials made no mention of whether the recent Sports Authority bankruptcy and other retail store closures would lead to any writedowns, but they did call out the “rapidly evolving” retail landscape on numerous occasions
“We are also investing to more seamlessly integrate digital and physical retail, and working more strategically with our strongest wholesale partners to shape the future of retail,” Nike CFO Andy Campion said.
As of the end of its fiscal fourth quarter, May 31, Nike’s inventory levels in its full-price in-line channels were clean and consistent with internal goals, officials said. Looking ahead to its fiscal first quarter, Edwards said Nike will be continuing to clear excess inventory through its factory stores and select third-party value channels while keeping in-line supply tight to insure a strong pull market.
As a result, North America’s gross margin is expected to contract in the first quarter as Nike completes the clearance actions, with a return to gross margin expansion over the course of fiscal-year 2017. And despite the inventory cleanup, growth is expected to return in first quarter with the gains accelerating over the balance of the fiscal year.
“With our brand proven time and time again, it remains incredibly strong in North America,” Edwards said. “We are confident that the actions we are taking will ensure that we are set up to deliver long-term profitable growth.”
Elsewhere In The World
In other regions, Nike Brand sales in Western Europe grew 19 percent on a currency-neutral basis (18.5 percent reported) in the quarter, to $1.5 billion. All territories grew double-digits and all key categories grew, led by sportswear, global football, Jordan Brand and running. Its Western Europe DTC business expanded 26 percent in the quarter. Operating profits advanced 11.2 percent to $308 million. Currency-neutral sales grew 14 percent in the region for the year. On a reported basis, fiscal-year 2016 revenue increased 3 percent, reflecting FX headwinds.
Edwards noted that Nike during the quarter extended its sponsorship of FC Barcelona and saw a good response to its new national team kits featuring engineered knit zones to support fit and breathability at the Euro Championships. Said Edwards, “The momentum we have seen in fiscal-year 2016 in Western Europe combined with the strength of the Nike brand, reinforces our view that there is tremendous growth potential in this geography.”
In its Emerging Markets region, sales for Nike Brand grew 12 percent on a currency-neutral basis (6.7 percent reported) in the quarter, to $872 million. Double-digit growth on a currency-neutral basis was seen in SoCo, Korea, Pacific, Mexico and Africa. For the full year, Emerging Markets revenue increased 13 percent on a currency-neutral basis, but fell 5 percent on a reported basis, impacted by FX headwinds. Revenue in Brazil declined due to the challenging macroeconomic environment; however inventories are healthy and Nike said it continues to take share.
In Greater China, sales for Nike Brand grew 23 percent on a currency-neutral basis in the quarter to $3.8 billion with double-digit growth in both footwear and apparel, in both DTC and wholesale, and across nearly all key categories. Reported revenues were up 18.1 percent. For the full year, Greater China’s revenues for Nike Brand grew 27 percent on a currency-neutral basis (23 percent reported). Nearly all categories grew in the year, lead by sportswear, running, Nike basketball and Jordan. DTC sales in the year jumped 44 percent in China, with continued strong growth online as well as in its stores. Nike’s reprofiled wholesale partner doors in China continue to outperform the rest of the fleet.
In Japan, sales for Nike Brand in the quarter advanced 15 percent on a currency-neutral basis (21.7 percent reported), to $280 million. In some smaller overseas regions, sales for Nike Brand in the quarter in Central & Eastern Europe were flat on a currency-neutral basis (off 4.2 percent reported) in the quarter, to $345 million.
Converse’s revenues were up 18 percent in the quarter on a currency-neutral basis (17.9 percent reported), to $513 million. The gains were mainly driven by a major system go-live that accelerated orders from the fourth quarter to the third quarter in the prior year. EBIT jumped 60 percent to $128 million.
The overall earnings dip for Nike Inc. largely reflected lower gross margin, higher selling and administrative expense and a higher tax rate.
Gross margin declined 30 basis points to 45.9 percent as higher average selling prices were more than offset by higher product costs, the negative impact of clearing excess inventory in North America and unfavorable changes in foreign currency exchange rates.
Selling and administrative expense increased 7 percent to $2.8 billion, reflecting investments in digital demand creation, sports marketing and brand events, which were partially offset by, lower advertising expense. As a percent of sales, SG&A increased to 33.6 percent from 33.4 percent.
The bottom line was impacted by an estimated loss of $66 million due to changes in foreign currency valuations. The effective tax rate also increased to 21.2 percent, compared to 17.8 percent for the same period last year, primarily due to adjustments in the prior year to reduce tax expense recognized in the interim quarters of fiscal-year 2015 on intercompany transactions.
Breakdown In Annual Performance
As usual, Nike also provided more in-depth look into channels, genders and categories for the full year for Nike Brand.
By channel, wholesale revenues expanded 9 percent on a currency-neutral basis (2.8 percent reported), to $22.6 billion in the year. DTC sales rose 25 percent on a currency-neutral basis (18.4 percent reported), to $7.9 billion.
By gender, the strongest gains came in women, up 17 percent on a currency-neutral basis (9.8 percent reported), to $6.3 billion. Men’s was ahead 11 percent on a currency-neutral basis (4.9 percent reported) to $15.4 billion. Young Athletes’ revenues in the year also rose 11 percent on a currency-neutral basis (6.0 percent reported), to $4.56 billion.
By category on a wholesale equivalent basis, Nike Brand saw a 10 percent increase (3.2 percent reported) in running, its biggest category, to $5.02 billion. Wholesale-equivalent sales include both sales to wholesale partners as well as adjusted internal sales to its DTC operations charged at prices comparable to prices charged to external wholesale customers.
In basketball, Nike basketball was up 2 percent on a currency-neutral basis (down 0.5 percent reported) to $1.38 billion. Jordan Brand, broken out for the first time, expanded 21 percent on a currency-neutral basis and 18.2 percent on a reported basis, to $2.75 billion.
In global football (soccer), currency-neutral revenues were up 7 percent (down 4.8 percent reported), to $2.1 billion.
Men’s training was ahead 6 percent on a currency-neutral basis (2.6 percent reported) to $2.6 billion. Women’s training advanced 11 percent on a currency-neutral basis (4.9 percent reported) to $1.34 billion.
Sportswear revenues jumped 22 percent (13.8 percent reported), to $7.5 billion.
Action sports’ revenues reached $711 million, up 3 percent on a currency-neutral basis but off 3.5 percent on a reported basis. Golf revenues were off 6 percent on a currency-neutral basis (8.2 percent reported), to $513 million.
Expanding on a few key categories, Edwards noted that running was led last year by its Pegasus franchise and statement apparel, including the Dry-Fit cool top, the AeroSwift short and the Power Speed tight.
”Q4 was also highlighted by key innovative footwear launches, led by the LunarEpic, a disruptive style that offers an amazingly smooth ride and a remarkable sock-like fit,” Edwards said. “Excitement is building for the LunarEpic mid and the LunarEpic low which will launch in a couple of days.”
Nike also extended the Nike Free platform with the launch of the Free Run, the Free Run Flyknit and the Free Run Motion, which saw strong sell-through for both men and women. The Nike Tech Hypermesh apparel line, including the Wind Runner and the Bomber, also saw strong sell-through
In basketball, the Lebron Soldier 10, the shoe Cleveland Cavalier Lebron James wore during the playoffs, “has seen incredible sell through in the week since it was released.” The Kyrie 2 has likewise “seen strong sell through across multiple color ways,” and the initial launch the prior week of Kevin Durant’ KD9 “sold out completely.” Jordan footwear is being boosted by Air Jordan 30, Jordan Ultra Fly and Air Force One Flyknit Low as well as the Air Jordan Retro 12 on the sportswear side.
The Sportswear category’s strength is being led by styles such as the Roshe, Huarache and Foam Posit.
The Look Ahead
For the current fiscal year, Nike expects reported revenue to grow at a high-single-digit rate, reflecting high-single-digit to low-double-digit growth on a currency neutral basis. FX headwinds are expected to have a bigger impact in the first half of fiscal-year 2017, primarily due to developing market currencies. For its fiscal first quarter, Nike expects mid-single-digit reported revenue growth, roughly 3 points below its reported rate of futures growth.
Gross margin for the full year is projected to expand by 30 to 50 basis points, in line with its long-term financial targets. This reflects higher average selling prices, ongoing manufacturing productivity initiatives, and continued strong growth in its Nike.com business, as well as the favorable impact of lower oil on material’s costs. These benefits will be partially offset by continued labor cost inflation and FX headwinds.
For its fiscal first quarter, gross margin is expected to decline approximately 100 basis points, driven primarily by FX headwinds, including year-over-year changes in its hedge rates. SG&A is expected to increase for the year in the high-single-digit range, in line with its reported fiscal-year 2017 revenue guidance. SG&A growth is expected to land in the mid-to-high teens in the first quarter, significantly higher than the full-year rate to support marketing around the Olympics and European Football Championships.
Photo courtesy Nike