An acceleration of growth in North America, double-digit gains overseas and continued over-sized online gains drove Nike Inc.’s earnings ahead 14.9 percent in the first quarter ended August 31–exceeding internal expectations and Wall Street’s targets. Revenues grew 9 percent on a currency-neutral basis.

“We are delivering stronger, more broad-based momentum around the world than the expectations we set entering the fiscal year,” said Andy Campion, EVP and CFO, on a conference call with analysts. “We have continued strong growth in international markets, led by Greater China growing at 20 percent, and our international growth is now being amplified by very strong sustainable growth in North America.”

Campoin, along with Mark Parker, CEO, attributed the performance to the benefits of the Consumer Direct Offense initiative. Specifically, the initiative focuses on amplifying efforts to drive innovation, build direct connections with consumers and speed product to the marketplace.

“Through the Consumer Direct Offense, we’re taking a winning formula and executing it across our complete portfolio, and it’s leading to the balanced growth that you see today,” said Parker.

Highlights of the quarter include:

  • Revenue increased 9.7 percent to $9.95, and up 9 percent on a currency-neutral basis. Wall Street’s consensus target had been $9.94 billion. Stronger-than-projected currency-neutral growth was driven by acceleration in North America and continued strong momentum in international markets, albeit slightly offset by FX headwinds within the quarter.
  • Growth across geographies was led by Nike Direct, with Nike Direct growing 12 percent and Nike Digital growing 34 percent on a currency-neutral basis. Nike Digital growth outpaced all other channels
  • Gross margin increased 50 basis points to 44.2 percent primarily due to higher average selling prices, favorable full-price sales mix and margin expansion in Nike Direct, partially offset by higher product costs.
  • Demand creation grew 13 percent, primarily driven by sports marketing investments, as well as the support of “key moments in sports events” such as the World Cup.
  • Operating overhead expanded 5 percent, driven by investments in digital capabilities as well as in supply chain and enterprise technology platforms.
  • Net income improved 14.9 percent to $1.09 billion, or 67 cents a share, exceeding Wall Street’s consensus estimate of 62 cents.

Total Nike Brand sales advanced 9.7 percent to $9.42 billion and gained 10 percent on a currency-neutral basis. Total Nike Brand EBIT (earnings before taxes and interest) reached $1.59 billion, a gain of 10.7 percent.

On a currency-neutral basis, Nike Brand footwear sales grew 10 percent to $6.04 billion, apparel advanced 11 percent to $2.95 billion and equipment fell 1 percent to $416 million.

By region, North America revenues for Nike Brand grew 5.6 percent to $4.1 billion and grew 6 percent on a currency-neutral basis. Nike Brand sales were up 3 percent on currency-neutral basis in the fiscal fourth quarter. EBIT in the region advanced 7.5 percent to $1.08 billion.

“In North America, we have returned to strong sustainable growth,” said Campion. Nike’s fourth quarter saw currency-neutral revenues in the region expand 3 percent, the first quarterly gain in four quarters.

Campion said the region was paced by accelerating growth across both Footwear and Apparel, driven by new innovation platforms as well as strong owned and partner Digital growth. He added, “Wholesale has also returned to growth, yet we see even greater opportunity to drive differentiation across the wholesale marketplace going forward in part by leveraging our learnings from the Nike App at Retail and Nike by Melrose.”

Another growth opportunity in North America is Jordan Brand. Said Campion, “In the second half of FY18, we tightened supply. We also reset our approach to Jordan retro, creating more current stories and collaborations with respect to Jordan’s most iconic styles. We are now bringing those icons to life in more compelling ways for the new generation of Jordan consumers, and, as a result, the Jordan Brand is back to a pull market. We are also beginning to add greater dimension to the Jordan Brand. For example, for Women, we are extending sizes in the icons we know they already love and also creating new silhouettes and collaborations made specifically for her.”

Apparel and performance basketball also represent significant growth opportunities going forward for North America. Said Campion, “As the football and basketball seasons ramp up, our brand momentum will continue to build in North America. At the same time, we are not taking our momentum for granted. We continue to identify and attack opportunities to elevate our game and drive strong, sustainable growth in this important geography.”

In the Q&A session, Campion noted that North America region is expansion in average selling prices as well as units as well as balance growth across footwear and apparel. He added, “And we see that strong and balanced growth continuing over the balance of the year.

Regarding its DTC business in North America, digital is seeing “extremely strong double-digit growth.” Campion added, “We have taken a number of actions to remove friction, enhance the consumer experience, allocates product to that channel where we know consumers’ demand is robust. And we’re actually using data and demand sensing to better lineup supply with demand digitally. So, incredibly strong growth digitally.”

In-line stores are seeing strong comps, traffic gains and healthier conversion. Factory outlets remain “a very profitable dimension of the business” but is having some assortment shortages given the strength in the full-price business digitally and at its in-ilne stores.

In the Europe, Middle East & Africa (EMEA) region, sales for Nike Brand rose 11.2 percent to $2.61 billion and added 9 percent on a currency-neutral basis. EBIT was $501 million, up 11.1 percent.

The revenue gains were driven by strong growth in Sportswear and healthy growth in Running and Jordan. Digital grew strong double-digit rate to lead channel growth.

Campion noted that EMEA contains five of the 12 key global cities the brand targets and Nike is rated #1 by consumers. Nike Brand growth in EMEA is also over-indexing the broader market.

Connecting more deeply with consumers in key cities has been particularly beneficial to the EMEA region. Campion said Nike Brand benefited from having both teams in the World Cup. An “Awaken the Phantom” campaign supporting Nike Brand’s new Global Football franchise, the Phantom,  generated over 50 million views in the first two weeks. The launch of a Jordan-branded Paris Saint-Germain team kit and collection of apparel was “phenomenal, with the key styles selling out immediately.”

Said Campion, “While Nike has become the leading Brand in EMEA, we are far from having achieved our full potential. We see the opportunity to both grow the market for Athletic Footwear and Apparel across Europe and also create even greater separation from the competition as a Brand. That is why we believe we can sustain strong growth in EMEA over the long term.”

Greater China’s sales for Nike Brand grew 24.5 percent to $1.38 billion and added 20 percent on a currency-neutral basis. EBIT reached $502 million, a year-over-year gain of 24.7 percent.

The growth, marking 17 consecutive quarters of double-digit revenue growth in the region, was fueled by Sportswear, Jordan, Basketball and was seen across Women’s and Young Athletes. Growth was also strong and balanced across both footwear and apparel.

Campion said Nike Brand is driving connections in key cities, mentioning Shanghai and Beijing, and finding success “innovating in this large, digitally-native marketplace.” Digital growth remains strong and accelerated in Q1 with the aid of partnerships with Tmall and WeChat.

At the largely Nike-branded physical retail environment in China, digital connections are also being made. For example, Belle, which was acquired last year by Hillhouse, “has already rolled out connected inventory that enables a more direct Nike Consumer Experience with a faster and easier way to fulfill consumer demand, fully leveraging their roughly 2,500 touchpoints,” said Campion.

In the Asia Pacific & Latin America (APLA) region, sales for Nike Brand were up 6.8 percent to $1.27 billion but grew 14 percent on a currency-neutral basis. EBIT in the region grew 24.2 percent to $323 million.

The gains were fueled by balanced double-digit growth across footwear and apparel and led by Japan, Mexico and Korea. A focus on Women’s and digital is paying off. Women’s growth is accelerating due to marketing campaigns such as “Come Out In Force” and “Rally Cry” focused on inspiring and empowering Women through sport. Digital vaulted over 70 percent in Q1 in the region due to continued expansion across the region.

Said Campion, “We will continue to sustain strong growth as we roll out the Nike SNKRS app in markets such as Mexico and Brazil and bring the Nike Live retail concept to Tokyo later this fiscal year. Beyond Nike Direct, we are also expanding our digital connectivity to consumers in this region through entrepreneurial commerce partnerships such as with Flipkart, Zozotown and several others. We see continued momentum in APLA over the course of FY19 and will continue to invest in this fast-growing geography as we move even closer to the Tokyo Olympics in 2020.”

Converse’s revenues were up 9.1 percent to $527 million and added 7 percent on a currency-neutral basis. Converse’s EBIT increased 10.1 percent to $98 million. Growth was fueled by double-digit revenue growth in Greater China and strong double-digit Digital growth globally. Converse experienced declines in undifferentiated wholesale primarily in the U.S. and UK. Said Campion, “As we move through FY19, we will be expanding Converse’s product portfolio while also elevating the Converse-branded digital ecosystem.”

Nike’s guidance remained unchanged despite the better-than-expected Q1 performance.

Said Campion, “We are off to an even stronger start to the fiscal year than we initially expected. Our currency-neutral growth and profitability is exceeding our expectations. At the same time, global trade uncertainty and geopolitical dynamics have resulted in the dollar strengthening and foreign exchange shifting to a slight headwind over the past 90 days.”

Revenue growth is expected in the high-single-digits, albeit still at the lower end of that range, as operational upside will likely be somewhat offset by FX headwinds. Margin are expected to expand 50 basis points or slightly greater, while SG&A is projected to grow in the high-single digits.

Photo courtesy Nike