With strong double-digit growth overseas, Nike Inc. reported second-quarter earnings and sales that topped Wall Street’s expectations but growth in North America decelerated further in the period. Nike officials further indicated that it will take one or two quarters for growth to resume in the region.
Nike also maintained its guidance for the full year despite the better-than-expected quarter results and gave weak guidance for the current fiscal third quarter with hopes for an acceleration in revenues in the fourth.
On a conference call with analysts, Nike officials noted part of the challenge in the North American marketplace is while they’ve stepped up innovation as part of its Consumer Direct Offense launched earlier this year, many of the major launches won’t arrive in the North American marketplace until late in fiscal Q3, or early spring.
“What’s beneath the surface of our results is we’re building momentum,” said Andy Champion, Nike’s CFO, of the North American marketplace. “And we’re going to see that momentum build monthly over the second half, particularly as we start to launch some of these products late in Q3 and then scale them in Q4.”
Mark Parker, CEO and president, added that beyond being impacted by the consumer shift to digital that’s impacting all of North American retail, the sporting goods space is being impacted by ”a promotional backdrop and some continued retail consolidation in the North American market.”
But he likewise indicated that Nike’s success in launches such as the Air VaporMax is already showing that there’s “a real consumer appetite for innovation and new retail experiences.” The innovation coming down the pipeline is expected to support greater demand for premium product and “a real pull market for us,” Parker stated.
Also helping is the success the Nike brand is already seeing in expanding its Nike + membership with its investments in apps and digital connections to get closer to consumers. Said Parker, “We know that, that’s also a major factor in driving full-price demand with the consumer.”
Parker added, “I would say that disruption really is what’s creating opportunity. So we’re investing in a sustainable platform in North America for long-term growth, and we see that wave of growth coming for Nike in the U.S. building in Q4 and then moving through fiscal ’19.”
In the quarter ended November 30, North-American sales for Nike brand declined 4.5 percent to $3.49 billion and was down 5 percent on a currency-neutral basis. Growth in its Nike Direct business continues to outpace growth in the consolidating wholesale marketplace in the region.
Sales worsened from the decline on a currency-neutral basis of 3 percent seen in its first quarter.
Sales in the North American market began slowing last year amid the string of bankruptcies that led to inventory across the marketplace. For its 2017 fiscal year, sales on a currency-neutral basis was up only 1 percent in the fourth quarter and grew 3 percent both the second and third quarter after having climbed 6 percent in the first quarter.
EBIT in the North America region in the latest quarter dropped 14.1 percent to $783 million, driven by investments in SG&A, including the launch of its new partnership with the NBA and the relaunch of the NikePlus membership program.
Despite the decline in sales, Nike saw signs that the North American business is starting to turn.
Champion stated, “While the marketplace continues to evolve and remains promotional in the short term, we see momentum and a pull market building beneath the surface of our aggregated results.”
For instance, Champion noted that even with the promotional climate in the U.S., many new innovations hitting the marketplace are seeing a strong consumer response at the higher end of the price spectrum and “we’re seeing sellouts and incredibly strong demand.”
The CFO noted that many of those major launches will be scaled across price points and categories to feed larger revenue opportunities.
Trevor Edwards, president of Nike Brand, likewise asserted that Nike’s strategies in the North American marketplace are “starting to pay off as we reignite the U.S. marketplace.”
Among the steps taken was an upgrade of the Nike.com and app experience with better search functionality, improved product presentation and faster checkout. The Nike+ membership program “is already showing good results, including a significant uptick in new and buying members,” he said.
Nike+ members also now have personal access to expert advice and recommendations through the Nike app. Said Edwards, “All told, this improved consumer experience have led to increased engagements and overall conversion.”
Edwards also said Nike is working with key partners to help them transform the consumer experience “as we accelerate the shift toward differentiated retail.” On its Investor Day in October, Nike officials said that 40 percent of its sales are being conducted in “differentiated” spaces currently and the goal is to double that to 80 percent by 2022. Nike will refocus on about 40 global retail partners to accomplish the goal.
On its second-quarter quarter conference call, Edwards offered as an example of those efforts the new Finish Line flagship door in Los Angeles featuring RFID digital displays that let consumers scan footwear to see product details and content on each style. The brand’s Sneakeasy pop-up in New York with Foot Locker was also called out for delivering “more tailored experiences” to shoppers. Said Edwards, “These consumers’ experiences create strong energy across the marketplace, and the initial consumer response has been very positive.”
Edwards added, “So as we execute against our Consumer Direct Offense in the United States, we’re creating a healthier market as we manage supply tightly to demand, as we deliver stronger full-price sell-through with new innovation and drive brand heat and most importantly, make the investments that fuel long-term growth. In the end, all over the globe, we’re seeing exciting successes in our greatest growth opportunities, but it’s the momentum we’re continuing to build that gives us tremendous confidence in the year ahead.”
Companywide, net earnings in the second quarter declined 8.9 percent to $767 million, or 46 cents a share, easily topping Wall Street’s consensus estimate of 40 cents. Sales rose 4.6 percent to $8.55 billion, also above the consensus target of $8.4 billion.
For the quarter, Nike brand revenue grew 4 percent on a currency-neutral basis, and revenue for Nike Direct was up 15 percent, driven by online growth of 29 percent, comp store growth of 6 percent and new stores. Reported sales for the Nike brand advanced 5.3 percent to $8.14 billion. Total Nike brand EBIT (earnings before interest & taxes) was down 4.8 percent to $1.19 billion.
At Converse, sales were down 1.9 percent to $408 million and was off 4 percent on a currency-neutral basis. International growth was more than offset by a decline in North America. Operating income slumped 38.5 percent to $48 million due to gross margin contraction and demand-creation investment “to drive brand heat and reignite growth in the North America market,” said Champion.
The companywide earnings decline reflected an erosion in gross margins by 120 basis points to 43.0 percent in Q2. Higher average selling prices were offset primarily by foreign exchange and to a lesser extent, higher average product cost.
SG&A was up 10 percent in Q2, due primarily to a 15 percent increase in marketing investments, primarily driven by sports marketing, its new partnership with the NBA and the launch of new digital and physical retail experiences in key cities. Operating overhead increased 8 percent, driven primarily by investments in its Nike Direct businesses. Overall, SG&A as a percent of sales increased to 32.4 percent from 30.6 percent.
Outside of North America, the strongest regional gain was seen in Greater China, where sales for Nike brand improved 15.8 percent to $1.22 billion and gained 15 percent on a currency-neutral basis.
The gains were led by double-digit growth across footwear and apparel in most categories. Said Edwards, ”We’re seeing great sell-through across our power franchises from the VaporMax to the LEBRON 15 to the Air Force 1 and the Jordan 1.”
By channel, Nike Direct is driving the improvement, fueled by Nike.com and its partnership with Tmall. But the brand is also seeing “very strong comp store results,” in China, according to Edwards. The overall Greater China Direct business was up over 30 percent in Q2.
A highlight in the quarter was Singles’ Day, when the brand set records and emerged as the #1 overall brand for both footwear and apparel.
Edwards said the potential in China continues to be evident as the country embraces sports. At the Shanghai Marathon, which Nike sponsored for the 6th straight year, a record 120,000 individuals signed up to fill 38,000 available spots. Said Edwards, “This growth and the opportunities in front of us keep us very excited about the results we see in Greater China.”
In the EMEA (Europe, Middle East & Africa) region, sales for Nike brand increased 19.0 percent to $2.13 billion and gained 14 percent on a currency-neutral basis. Edwards said Nike “took share across the marketplace, fueled by very strong digital and comp store growth.”
New store openings with its joint-venture partners “are seeing excellent result,” with the benefit of new capabilities such as inventory integration and membership pushes. A pilot of shoppable Instagram stories with Zalando and ASOS was successful.
EBIT in the EMEA improved 7.7 percent to $337 million. Strong revenue growth and SG&A leverage were partially offset by lower gross margin, with gross margin contraction primarily driven by transactional FX headwinds.
In the APLA (Asia Pacific & Latin America) region, sales for Nike brand advanced 5.6 percent to $1.27 billion and gained 8 percent on a currency-neutral basis. The gains were driven by strong double-digit growth in Nike Direct, sportswear and basketball and was balanced growth across footwear and apparel. The region is being aided by its focus on key cities such as Tokyo, Seoul and Mexico City and the acceptance of its apps with local consumers. Operating profits in the region grew 9.4 percent to $291 million, driven by revenue growth and SG&A leverage.
Among major product categories, Nike basketball grew strong double digits in Q2, supported by its new NBA partnership and “strong demand” for the NBA Connected Jersey and the Showtime Hoodie. In footwear, a “phenomenal response” was seen for the LEBRON 15, the KYRIE 3 continues to be the #1 selling shoe in the market, and strong sell-throughs were seen with the PG 1 and the KD 10.
For Jordan Brand, “great results” were seen from the launches of AJ 32 and the AJ 11. The Air Jordan 1 was the “most coveted product in The Ten collection,” said Edwards. The Jordan brand is also making progress in “accelerating into new dimensions” across performance and lifestyle with international pushes as well as expanding in apparel and women’s. The Heiress 11 designed specifically for women, for example, “sold out quickly” across the marketplace. To support the performance side, sponsorships were reached for the Jordan brand with Florida and Oklahoma.
Said Edwards, “Ultimately, growth in Jordan will be driven by further dimensionalizing Jordan’s iconic sneakers and the overall brand to create new growth opportunities. We are activating against these new dimensions, now and into the future.”
In running, the highlight in the quarter was the Zoom Vaporfly 4% as Nike-sponsored runners won six marathons this fall with the model. Said Edwards, “The energy around the Vaporfly 4% and the ZoomX cushioning has a real impact on the rest of our Running business. It shows how truly break-through performance product drives distinction and creates demand in the market.”
In women’s, Edwards didn’t detail how the overall business performed but said Nike plans to quadruple women’s over the next five years with a focus on workout gear.
“We’re also #1 globally in pants and tights, and we see more growth ahead as we introduce new styles across statement and core,” said Edwards. “Last month, we launched our new Nike Pants Studio on NIKE.com and at thousands of doors worldwide. The studio launched with new and updated workout tights and pants, providing more choice in materials, finishes and lengths driving stronger in-season sell-through.”
Edwards called footwear a “massive untapped opportunity” in women’s and big campaigns around Air VaporMax, the Air Max 97 and the Female Air Force 1 collection are being launched with partners such as Nordstrom.
Finally, Sportswear, the Nike brand’s largest category that includes its lifestyle offerings, scored another quarter of double-digit growth. Tech Fleece and Basketball off-court apparel continued to show strength while the celebration of the 35th anniversary of the Air Force 1 and relaunch of Air Max 97 were both hot sellers.
In his presentation, Parker discussed the progress the company was making on its “Triple Double” initiative to double its investments in innovation, speed and digital.
Among the innovations in running, Parker said Nike React technology will be available for the first time in a few weeks with the arrival of the Epic React. Next summer, its successful ZoomX platform will be more accessible on the Pegasus 35.
The Air Max 93, Air Max 98 and Air Max 270 will arrive next March to support Air Max Day. In basketball, the KYRIE 4 and the PG 2 will arrive in coming weeks along with a new Flyknit construction on Kobe’s next model. Giannis Antetokounmpo will get his first signature shoe next year. Russell Westbrook will see his first signature shoe under the Jordan brand.
On the apparel side, major statements will be made during the spring and summer tied to the NBA All-Star Game, the tennis majors and World Cup.
The payback from its digital investments can be seen in the Nike+ app’s Reserved For You service, which is converting sales at a rate that’s 40 times greater than traditional outreach. Parker also noted that many of its popular apps are just reaching foreign markets. For instance, the SNKRS app reached China earlier this month and will reach Japan later in its current fiscal year.
In the U.S., Nike this spring is running a pilot with Stitch Fix, the online personal styling service, to bring personalized women’s products to its audience. The Amazon pilot is also being extended. Said Parker of Amazon, “It’s going well, and we remain focused on learning and elevating the consumer experience.”
Another major launch set for next year is bringing the technology behind the NBA Connected Jersey to Air Force 1.
“We see massive potential in the future where more Nike products are connected, bringing consumers inspirational content and serving as the on-ramp for Nike membership,” said Parker. “And you can envision where that future goes, where consumers seamlessly engage with us through digitally connected products that continue to inform our design, manufacturing and distribution capabilities, creating new growth opportunities across each of our Triple Double pillars.”
Parker concluded in his presentation, “It should be clear that Nike is actively driving change in our business and throughout our industry. We’re partnering, experimenting and we’re fast tracking our greatest opportunities. We’re off to a good start, and we see a long runway of growth ahead.”
Looking ahead, Nike maintained its guidance for its fiscal year. Revenue is expected to expand in the mid-single-digit range, gross margin is expected to contract between 50 to 100 basis points, and SG&A is expected to increase in the mid-single digits.
Champion indicated that some challenges faced in the third quarter will be made up with a stronger fourth quarter.
For the third quarter, Champion warned that reported revenue growth will be “at or slightly below the rate of reported revenue growth that we delivered in Q2, with the timing of new product launches coming later in the quarter.”
Gross margins in the third quarter are expected to contract 125 to 175 basis points due to FX headwinds and the continued promotional environment across the broader U.S. retail landscape. “Significant sequential improvement” is expected in gross margins in Q4 when FX pressures ease. Said Champion, “We are seeing improvement in the underlying drivers of gross margin expansion.”
Finally, SG&A is expected to expand at low double-digits in Q3, well above the full-year expected rate. Stated Champion, “While we remain disciplined in our spending, we are also identifying opportunities to accelerate investment that will fuel growth. For example, we see opportunities within demand creation to drive brand distinction and heat and with an operating overhead to elevate our digital capabilities.”
Photo courtesy Nike
