Shares of Nike Inc. shot up $8.00, or 11.2 percent, to $79.70 to surpass an all-time high on Friday as the sports leader saw growth for the first time in four quarters in the U.S. The gains were boosted by the success of several break-through product launches and the payback of investments in direct-to-consumer and digital engagement.
In the quarter ended May 31, Nike Inc.’s revenues advanced 8 percent on a currency-neutral basis. Reported revenues expanded 12.8 percent to $9.8 billion, exceeding Wall Street’s consensus estimate of $9.4 billion.
The currency-neutral gains were carried by double-digit international growth. Nike direct led growth globally, including 5 percent comp store growth and 34 percent digital growth.
Net income rose 12.8 percent to $1.14 billion, or 69 cents per share, exceeding Wall Street’s average target by 5 cents. The beat reflected strong revenue growth, gross margin expansion, a lower tax rate and a lower average share count, which partly offset higher SG&A expense.
Gross margin in the quarter expanded over 60 basis points in Q4 to 44.7 percent, exceeding internal expectations due to accelerating full-price sales and Nike digital growth.
SG&A expenses rose 17.0 percent to $3.1 million. Marketing expenses climbed 24.7 percent, primarily driven by new sponsorships such as Chelsea, Tottenham and the NBA; marketing around events such as the NBA Finals and the World Cup and campaigns supporting product launches. Overhead expenses grew 13.9 percent due to various investments supporting digital and innovation.
The top-line growth was again led by strength overseas, led by a currency-neutral gain of 25 percent in China, 12 percent in the APLA region and 10 percent in the EMEA region.
North American Recovery Led by Digital
Particularly notable was the recovery in North America, where revenues on a currency-neutral basis climbed 3 percent in the fourth quarter, led by new innovation platforms, “very strong” digital growth, continued momentum in Sportswear and broad growth across apparel, said Andy Campion, CFO, on a conference call with analysts.
Reported sales rose 3.3 percent to $3.88 billion. EBIT in the region was basically flat at $975 million against $979 million a year ago.
The region had marked three straight declines on a currency-neutral basis, down 6 percent in its fiscal third quarter, 5 percent in the second and 3 percent in the first. Sales had risen 1 percent in fiscal 2017 fourth quarter.
Campion said, “We’ve returned North America to revenue growth and expanding margins, and this healthy momentum is carrying forward into this new fiscal year.”
For Nike Brand, the return to growth was fueled by growth in both footwear and apparel with a slightly faster rate of growth in apparel, and part of that rate of growth was impacted by the new NBA partnership. The gains are being seen across both men’s and women’s in the region.
The turnaround partly reflects efforts to clean up inventories in the region.
As of May 31, global inventories were up 4 percent, growing slower than the rate of revenue growth, “which is an indication that our supply and demand management efforts over the course of fiscal year ‘18 have returned Nike to a strong pull market globally,” said Campion
But the turnaround also reflects the payback of the company’s Consumer Direct Offense, launched last June, which is designed to ramp up innovations, digital engagement and speed-to-market.
Particularly paying off are efforts to sell in more differentiated environments, both in the company’s own DTC channels, as well as key wholesale partners. Nike Consumer Experiences at retail, both owned and partnered, and particularly those that leverage a digital connection to the consumer, drove over two-thirds of the growth in North America in the quarter. But digital is driving all phases of the U.S. comeback.
“Digital connections have been critical to launching new and innovative products, creating brand heat and better serving consumer demand,” stated Campion. For example, as part of the Epic React launch, a Choose Go campaign inspired more than 1 million Nike+ members to participate in a run on the Nike Running Club app on launch-day and generated over 500 million social media impressions. An exclusive colorway of the Epic React was also launched at Dick’s Sporting Goods through a takeover of their digital commerce platform and social media channels.
Campion noted that Nike Brand is in the process of launching the Nike app at U.S. retail in key markets, bringing Nike+ membership into the store and accelerating the convergence of digital and physical retail.
In the Q&A session, Nike officials declined to project whether revenues in North America would accelerate in the rest of the year, but reiterated the company’s goal set last October calling for mid-single-digit growth in the region over the next five years.
“We have momentum going into the year,” said Campion. He cited new innovation platforms such as React that are scaling across categories, Nike Direct accelerating to over 30 percent growth in the region, strong appeal of Nike Brand’s SNKRS app launches and the company’s Nike+ membership.
“Importantly, we have returned North America to healthy pull market,” said Campion. “Inventory is clean, up only 2 percent; full price sales are accelerating; off price sales are declining and gross margins are expanding. So, we do see strong momentum, sustainable momentum going in to fiscal year ’19.”
Mark Parker, CEO, added on the region, “And much of what you saw in terms of Q4 in terms of the momentum that has been building, we’ll see that continue throughout the fiscal year. And I’ll put an exclamation point on the products as being a driving force beyond just executing some of the basics better across the board.”
Parker also said that both footwear and apparel are expected to drive the continued gains in the North American market in coming years. Said Parker, “The health of the business, both on the footwear and the apparel side, is actually quite strong, and demand that we’re seeing, we’re equally focused on innovation, both in performance and lifestyle and footwear and apparel. … The momentum it’s building. We’ll see that continue throughout the fiscal year, very bullish on both footwear and apparel, both performance and certainly Sportswear.”
Jordan Set to Resume Growth in Fiscal 2019
The Jordan Brand has reduced inventory in the U.S. marketplace and is “already back to a pull market” with a return to growth expected for fiscal 2019. Said Campion, “Consumers love the Jordan Brand, and their passion for the brand is unwavering.”
Campion also noted that while Jordan Brand tightened supply in some cases, expanded selections of best sellers were featured on Nike SNKRS app. Jordan Brand also leveraged both Jordan and Nike launches on the SNKRS app to merge digital and physical with strategic retail partners through initiatives such as Shock Drop, SNKRS Pass and SNKRS Stash.
Looking forward, Jordan Brand will continue to diversify with expansion in women, in performance and through apparel.
For the full year, sales in the North American region dipped 2 percent to $14.9 billion. Sales were down 2.4 percent to $14.9 billion. EBIT slid 7.1 percent to $3.6 billion.
Greater China Boosted by Tmall and Other E-Tail Alliances
Among other regions, currency-neutral revenues in Greater China gained 25 percent. Reported sales rose 35.1 percent to $1.47 billion. EBIT rose 41.8 percent to $539 million.
The currency-neutral growth was led by strong double-digit growth across all categories, the Jordan Brand and across Women’s.
“Nike Digital growth continues to outpace all other marketplace dimensions, and we continue to partner with and learn from China’s leading digital platforms,” said Campion. Though a partnership with Tmall, the first-ever Air Max Super Brand Day in March became Nike Brand’s second-largest day to Singles Day for the year. With Tencent, the launch of the Choose Go campaign inspired 2 million runners to participate in a seven-week running regimen while driving strong demand for Epic React.
For the full year, revenues in Greater China increased 18 percent on a currency-neutral basis, driven by Running, Sportswear, Jordan Brand and Nike Basketball. On a reported basis, FY18 revenues were up 21.2 percent to $5.1 billion and EBIT increased 19.9 percent to $1.81 billion.
Said Campion, “There are several drivers of the extraordinary long-term growth potential we see in Greater China, from favorable macroeconomics, to the rise of sport and fitness, to the scale and impact of digital, to the strength of the Nike Brand. Accordingly, we will continue to invest to extend our leadership in this strategically important and fast-growing market.”
EMEA Region Earns Boost from JD Sports
In the EMEA (Europe, Middle East & Africa) region, revenues grew 10 percent on a currency-neutral basis in the quarter. Reported sales improved 23.9 percent to $24.7 billion. EBIT in the quarter rose 9.8 percent to $382 million.
The sales gains were driven by strong growth in Global Football, Sportswear and Running. Apparel was “particularly strong “across Europe, driven by jersey sales tied to the World Cup. In footwear, Air Max remains the dominant platform in the region, with Air Max 270 becoming the number one style across key European markets and Air Max month in March propelling Sportswear to record full-year revenues.
Campion said Nike Brand is “also number one in all of our key cities across Europe,” fueled by campaigns such as “Nothing Beats a Londoner” that featured the voices of over 200 London consumers, along with influencers such as the rapper Skepta and several of the brand’s athletes, including Mo Farah and Harry Kane. Campion said, “This was a great example of a hyperlocal city campaign that resonated with our consumers globally.”
While Nike Direct continues to lead EMEA’s growth, JD Sports was called out as a key strategic partner in the region, including the retailer’s ability to engage through digital connections and create differentiated store concepts, including a variety of format sizes. JD Sports recently entered U.S. retailing with the company’s acquisition of The Finish Line. Said Campion, “We look forward to the best practices that they will bring to the North America marketplace.”
For the full year, currency-neutral revenue growth was 9 percent in the EMEA region, fueled by double-digit growth in Sportswear and across Apparel. Reported sales advanced 16.0 percent to $9.24 billion. EBIT moved up 5.3 percent to $1.59 billion as strong revenue growth was offset primarily by transactional FX headwinds on gross margin.
APLA Region sees Fastest Digital Growth Across Regions
In APLA (Asia Pacific & Latin America), Q4 revenue grew 13 percent on a currency-neutral basis. Sales rose 12.4 percent to $1.44 billion. EBIT advanced 22.7 percent to $340 million.
Currency-neutral growth was strong across all key countries and helped by its focus on key cities and digital. APLAs saw the strongest digital growth across regions. Growth “through new, entrepreneurial digital partners also accelerated” in the quarter in the region. Said Campion, “Looking forward, we will continue to drive digital momentum by scaling the Nike and SNKRS apps across key countries within APLA, while also continuing to explore and scale these digital partnerships.”
For the full fiscal year, revenue increased 10 percent on a currency-neutral basis, fueled by balanced growth across all categories, including the Jordan Brand and Women’s. On a reported basis, full-year revenues for the fiscal year increased 9.1 percent to $5.17 billion, while EBIT was up 21.3 percent to $1.19 billion, reflecting gross margin expansion and SG&A leverage.
Converse Declines on Distribution Rationalization
Outside Nike Brand, Converse’s revenues declined 14 percent on a currency-neutral in the fourth quarter, as growth in Asia was more than offset by declines in other territories. Reported revenues were down 7.6 percent to $512 million. EBIT slumped 24.1 percent to $104 million.
For the year, Converse’s currency-neutral revenues declined 11 percent, while reported revenues were down 7.6 percent to $1.9 billion. EBIT dropped 35.0 percent to $310 million.
Campion said the top-line declines were primarily driven by the decision to right-size wholesale distribution in North America and EMEA. At the same time, Converse direct grew double-digits in Q4, including strong double-digit growth in digital for the full-year with acceleration in Q4.
Campion said, “As we move into fiscal year ‘19, we are reigniting energy in the Converse brand, and diversifying Converse’s product portfolio, both through Converse’s authentic positioning in sport and through new sportswear styles and collaborations. In fiscal year ‘19, Converse will also launch a more direct, branded and immersive digital experience to drive closer connections between the Converse brand and its passionate consumers.”
Sportswear, Nike Basketball Lead Category Gains in FY18
For the full year, sales rose 6.0 percent to $36.4 billion and gained 4 percent on a currency-neutral basis. Nike Brand revenues reached $30.3 million, up 5.6 percent on reported basis and 4 percent on a currency-neutral basis.
Among key categories on a currency-neutral basis:
- Running rose 5 percent to $5.2 billion
- Nike Basketball added 14 percent to $1.49 billion
- Jordan Brand was down 9 percent to $2.9 billion
- Football (Soccer) rose 4 percent to $2.15 billion
- Training was flat at $3.1 billion
- Sportswear grew 8 percent $10.0 billion
- Others (categories and certain adjustments that are not allocated at the category level) were flat at $5.5 billion.
By channel, sales to wholesale customers were up 2 percent on a currency-neutral basis to $24.0 billion, while sales through Nike Direct jumped 12 percent to $10.4 billion. Direct revenues grew to 30.2 percent of Nike Brand’s revenues from 28.2 percent.
By gender on a currency-neutral basis for Nike Brand, men’s led the way in the company’s fiscal year in sales, rising 5 percent to $17.1 billion. Women’s was up 2 percent to $6.9 billion while Youth Athletes eased 1 percent to $4.9 billion.
Net income for the full year decreased 54 percent to $1.9 billion, or $1.17, primarily related to the impact of the Tax Act, which offset strong revenue growth. Income before taxes were down 11.5 percent to $4.3 billion.
Campion noted that Nike made progress during the year on goals set at the company’s Investor Day last October.
At that time, Nike said new innovation platforms will drive over 50 percent of the company’s incremental growth over the next five years. In FY18, revenue from new, innovative platforms drove over 80 percent of incremental growth, fueled by new platforms such as the Air VaporMax, React, the Air Max 270 and ZoomX.
Another goal set was that digital commerce growth, both owned and partnered, would comprise over 50 percent of Nike’s total company growth over the next five years. In FY18, Nike Direct drove over 90 percent of the company’s growth and 100 percent of growth was driven by the combination of Nike Direct and partnered Nike consumer experiences.
Nike also set a goal for international to drive over 75 percent of growth over the next five years and that North America would return to mid-single digit growth over the next five years. North America returned to growth in the quarter and international geographies accounted for over 100 percent of growth in the quarter, with Greater China growing nearly two times the rate of any other geography on a currency-neutral basis.
Said Campion, “As we enter fiscal year ‘19, we are now running a more complete offense across our global portfolio. “
Fiscal 2019 Outlook Slightly Raised
For fiscal 2019, Nike slightly raised the company’s revenue guidance, expecting growth in the high-single-digit range versus projections of mid-to-high-single-digit revenue growth issued on the company’s third-quarter conference call.
Campion said fiscal 2019 will be the first full year executing on Nike’s Consumer Direct Offense and it is “becoming increasingly clear that digital is transforming how we operate and will favorably reshape our economic model over the long term.”
The improved sales guidance also reflects building consumer demand for Nike,” as well as the negatives of “renewed FX volatility and the strengthening dollar of late.”
Gross margins are now expected to expand roughly 50 basis points or slightly greater, fueled by strong full-price sales, expanding average selling prices and growth in the company’s Nike Direct businesses, partially offset by higher input costs. Campion said the digital push has a favorable impact on gross margins “as we capture more of the value that we are creating for consumers.”
SG&A is expected to grow roughly in the same range as revenue growth and no expense leverage is targeted for fiscal 2019. Accelerated investments will continue to be made in digital, including possible acquisitions. Said Campion, “We are already seeing how upfront investments in experiences, like the Nike and SNKRS apps, and in capabilities, such as data and analytics, can be efficiently leveraged globally to better serve our consumers across our key markets. Finally, digital also creates the potential for win-win economic models with our wholesale partners over time as they transform their retail experiences to serve the next generation of digitally native consumers.“
Nike doesn’t provide EPS guidance.
Photo courtesy Nike
