Bolstered by accelerating sales of running and basketball footwear in the U.S. and improved margins, Nike Inc. reported a higher-than-expected profit in its fourth quarter ended May 31. More critically, it indicated that worldwide futures orders for Nike Brand were running ahead 8 percent at the quarter’s close, tossing aside concerns that Nike’s momentum in North America might be slowing.
Earnings from continuing operations in the quarter rose 24.5 percent to $696 million, or 76 cents a share, exceeding Wall Street’s consensus estimate of 74 cents a share. Gross margins widened to 43.9 percent from 42.8 percent a year earlier, marking the second straight gain after nine consecutive declines. The company had forecast an expansion of 0.5 percentage points.
Including results from Cole Haan and Umbro, which have been sold, net earnings rose 21.7 percent in the quarter to $668 million, or 73 cents a share.
Fourth quarter revenues from continuing operations rose 7.4 percent to $6.7 billion, or ahead 9 percent on a currency-neutral (C-N) basis. On a C-N basis, Nike Brand revenues rose 8 percent with growth across each product type and in every geography except Western Europe and Greater China.
The 8 percent gain in futures was supported by gains of 12 percent in North America, as well as the same increase in Emerging Markets and Central & Eastern Europe. Japan was ahead 6 percent while Western Europe and Greater China both had flat futures positions.
The fourth quarter capped off a robust year that saw companywide revenues grow 8.5 percent and earnings from continuing operations gain 8.6 percent. Nike Brand revenues grew 11 percent on a C-N basis for the year with growth every geography, except Greater China, and solid growth across all key categories. Nike brand DTC revenue increased 24 percent for the year, with online sales up over 30 percent.
On a conference call with analysts, Mark Parker, Nike’s president and CEO, noted that the company’s DTC business “is hitting on all cylinders,” but also attributed Nike’s robust fiscal year performance to efforts to collaborate with retail partners and the “never-ending energy” that comes from its support of events such as the Olympics, the Euro Champs, the BCS and Super Bowl, March Madness and the NBA Playoffs. But he particularly credited the brand’s success in innovation and also revealed intentions to accelerate those innovation investments going forward, helped by the recent realignment of its executive staff.
“I call it ‘Innovation Squared,’ where we can deliver more new ideas and solutions faster than ever before,” said Parker. “And we're leveraging those across our sport categories, geographies and brands. Amazing things in the market right now from Nike, and even more in the pipeline.”
In the quarter, overall Nike Brand revenues rose 6.7 percent to $5.98 billion. Revenues were higher in Running, Basketball, Men’s Training, and Women’s Training, offsetting slight declines in Sportswear, Action Sports and Football (Soccer), which reflects comparisons against strong sales last year in advance of the European Football Championships.
Total Nike Brand Footwear rose 6.6 percent in the quarter to $3.89 billion, Apparel climbed 5.9 percent to $1.69 billion and Equipment advanced 10.7 percent to $362 million. On a C-N basis, sales rose 8 percent in Footwear and Apparel and gained 13 percent in Equipment.
Revenues for Other Businesses (Converse, Nike Golf, Hurley) grew 10 percent in the quarter, including a 1-point reduction from changes in currency exchange rates, as revenues increased for each business during the quarter.
By region for Nike Brand, sales in North America rose 11.9 percent to $2.71 billion. The gains were driven by strong growth across every category, led by basketball, men's training, sportswear, and running.
On a C-N basis in the NA region, sales rose 8 percent in Footwear, 22 percent in Apparel, and 24 percent in Equipment. On a reported basis, Footwear revenues rose 7.5 percent to $1.79 billion, Apparel ran ahead 21.4 percent to $748 million, and Equipment climbed 23.6 percent $173 million. Direct-to-consumer revenues grew 16 percent in Q4, as comp-store sales increased 11 percent, marking the 14th consecutive quarter of double-digit comp growth for Nike-owned stores in North America.
EBIT in the NA region grew 28.6 percent to $723 million, due to robust revenue growth, gross margin expansion, and SG&A leverage
On the call, Charlie Denson, president, Nike Brand, who is retiring on July 1, heralded the NA region as “the MVP for the quarter and the year.” For the year, sales leapt 18 percent C-N in the region to $10.4 billion, EBIT climbed 25 percent, and inventory was up only 13 percent. Most key categories grew at a double-digit rate. North America DTC revenue increased 20 percent to over $2.5 billion, with double-digit comps in both its in-line and factory concepts. E-commerce was up over 30 percent, “and our work with our wholesale partners expanded the potential of the market and increased profitability,” said Denson.
Denson said Nike’s success in the U.S., its most penetrated market, “is the best example of what is possible, and it illustrates the potential we have around the world.”
In Greater China, total sales in the quarter were up relatively flat at $699 million, slightly up from $667 million a year ago. Double-digit growth in performance running and basketball was offset by declines in other categories, primarily sportswear.
On a C-N basis, sales were down 1 percent with Footwear and Apparel off 1 percent and Equipment losing 2 percent. On a reported basis, Greater China revenues were up slightly to $669 million, up from $667 million. Footwear revenues inched up 0.2 percent to $403 million, Apparel added 0.4 percent to $231 million, and Equipment was even at $35 million. EBIT was down 2.0 percent to $242 million.
Nike officials said that while China futures orders for the next six months are in line with last year, revenues for the first half of the current fiscal year will be below last year due to ongoing efforts to clean inventories. The region is expected to stabilize around prior year levels in the second half of the fiscal year.
Denson said Nike is working with its partners to improve supply chain efficiency, accelerate product flow, and elevate store merchandising. Similar efforts are bearing fruit in Nike’s DTC stores and partner doors that have been refitted with more focused assortments and product stories. Its first Running and Basketball stores opened in China in the fiscal year, and overall comp growth at its own in line and factory stores were up double digits in the quarter.
“These are all signs our strategy is working,” said Denson. “So we'll continue to go deeper with the consumer, expand our performance leadership position, and elevate and expand the retail experience for the consumer and our partners.”
In Western Europe, sales were flat in the quarter on a C-N basis. A 7 percent increase in Footwear was offset by declines of 15 percent in Apparel and 10 percent in Equipment. Reported sales slid 1.4 percent to $1.02 billion. Footwear revenues advanced 6.8 percent to $695 million, Apparel slumped 15.6 percent to $280 million, and Equipment was down 12.5 percent to $49 million.
Nike officials noted that the region faced challenging comparisons against strong sales last year in advance of the Euro Champs and Olympics. Declines of over 20 percent in Italy and Iberia were offset by double-digit growth in its AGS (Austria, Germany, Switzerland) territory and nearly 40 percent growth in DTC revenues. On a category basis, running grew double digits, and basketball more than doubled to help make up for lower sales in other key categories. EBIT inched ahead 1.5 percent to $135 million, helped by higher gross margin.
Denson said Nike is “expanding our number-one footwear position in the region, led by running, and we're gaining share in football across the continent. Inventories are in good shape, with European units essentially flat to prior year.”
In Central & Eastern Europe, sales on a C-N basis increased 15 percent in Footwear, 3 percent in Apparel; and 2 percent in Equipment. Reported sales rose 9.4 percent to $361 million, and ran up 11 percent on a C-N basis. Gains were seen across categories: Footwear, 14.4 percent to $223 million, Apparel, 1.8 percent to $113 million; and Equipment, 4.2 percent to $25 million.
The gains were led by led by strong growth in Turkey and Russia. The geography reported double-digit revenue growth for every category except sportswear and action sports, which declined. EBIT rose 18.3 percent to $84 million, primarily driven by lower marketing spending in comparison to last year's event-driven investments.
In Japan on a C-N basis, sales in the quarter rose 4 percent with gains of 10 percent in Footwear offsetting flat growth in Apparel, and a 9 percent decline in Equipment. Every key category except sportswear and action sports grew.
Sales were down 11.2 percent to $214 million, reflecting the impact of the weaker yen. Footwear was down 6.3 percent to $120 million, Apparel gave back 15.4 percent to $77 million, and Equipment tumbled 22.7 percent to $17 million. EBIT eased 2.0 percent to $42 million as the drop in revenue was partially offset by lower SG&A.
In its Emerging Markets region, revenues on a C-N basis climbed 16 percent overall, reflecting gains of 14 percent in Footwear, 18 percent in Apparel, and 32 percent in Equipment. Reported sales in Emerging Markets rose 10.3 percent to $960 million, Sales gained 8.4 percent to $658 million in Footwear, 12.2 percent to $239 million in Apparel, and 26.0 percent to $63 million in Equipment. EBIT climbed 30.3 percent to $262 million due to strong revenue growth, gross margin expansion, and lower year-on-year marketing spending.
The Emerging Markets increases were driven by strong growth in Brazil, Argentina and Mexico. Among categories, running, football, women's training and action sports powered the gains.
“We see this geography continuing to supply a strong growth story,” said Denson. “One of the biggest contributing factors will be the energy coming out of Brazil with World Cup, followed by the Rio Olympics.”
In its Other Businesses segment, reported revenues rose 10.4 percent to $732 million. The 11 percent C-N gain was driven by double-digit growth in Nike Golf and Hurley, and 9 percent growth in Converse. EBIT climbed 21.0 percent to $127 million, driven by higher revenues and gross margins in each business.
For the full fiscal year, Converse’s revenues rose 9.4 percent to $1.45 billion, paced by a strong growth in key international markets, with revenues up double digits in the recently converted markets of China and the UK. Said Parker, “Franchise product like Chuck Taylor delivered record sales again, and the brand's strong position in style and music continues to connect with young consumers around the world.”
Nike Golf’s revenues were up 9.4 percent to $791 million, powered by launches such as Covert Clubs, Lunar Control and Footwear, and the new TW13 shoe. Hurley’s revenues rose 4.8 percent in the year, to $260 million, which Parker noted outpaced the action sports industry.
The companywide gross margin improvement benefited from pricing actions, easing materials costs and favorable comparisons to last year, when gross margin was reduced by higher investments in the company’s digital business and an unanticipated customs assessment in the Emerging Markets geography. These factors helped offset higher labor costs, unfavorable changes in foreign exchange rates and higher discounts, particularly in Greater China, to work down inventories.
SG&A expenses were 30.2 percent of sales, just about flat with 30.4 percent a year ago. Marketing costs dropped due to higher prior year spending in support of the European Football Championships, the Summer Olympics and key product launches, but operating overhead expense increased due to additional investments in the company’s wholesale and DTC businesses.
Nike also offered additional data on its operating segments for the year. Sales to Wholesale customers grew 5.7 percent to $18.4 billion and increased 8 percent C-N. DTC sales were up 22.5 percent to $4.3 billion, or 24 percent C-N.
By category for Nike Brand:
Running's revenues rose 15.6 percent to $4.3 billion and 18 percent C-N;
Basketball jumped 21.1 percent to $2.63 billion, or 22 percent C-N; Football (soccer) improved 3.7 percent to $1.93 billion, or 9 percent C-N;
Men's training climbed 15.3 percent to $2.38 billion, or 17 percent C-N;
Women's training revenues were up 5.5 percent $1.07 billion 8 percent C-N;
Action sports eased 0.4 percent to $495 million but added 2 percent C-N;
Sportswear was down 1.8 percent to $5.6 billion but up 1 percent C-N.
Highlighting some categories, Denson noted that running footwear and apparel grew in the year in every single geography, and that momentum continues with futures growing at a double-digit rate. Factors driving running include innovations such as Nike Air, Lunar, Flyknit, Free, and Dri-Fit; event sponsorships such as the Nike Women's Half Marathon in Washington DC, its Nike Plus program that now counts over 18 million members, and retail partnerships such as Track Club with Finish Line.
In basketball, Denson noted that Lebron 10 MVP “sold through immediately,” and the next four top five MVP vote getters – Kevin Durant, Carmelo Anthony, Chris Paul and Kobe Bryant are all Nike endorsers.
“Brand Jordan is selling 3 times more today than when MJ was playing,” added Denson. “That's the power of the brand at work, and we're seeing even more upside as we continue to leverage our amplify sport model to increase revenue across both footwear and apparel around the world.”
In football (soccer), Denson pointed to the successes with the Mercurial and Hypervenom boots while also promising that “the real story isn't what we did in FY '13, it's going to be what's coming for World Cup. It's absolutely incredible, and that's all I'm going to say about that for now.”
Parker also touched on the pending exit of Denson announced the prior week. Gary DeStefano, president of global operations, also announced his retirement. Triggered by the retirements, Nike reset a host of responsibilities at the executive and senior level. These include Trevor Edwards, EVP of brand and category management, becoming Nike brand president; Eric Sprunk, EVP of merchandising and product, taking over as Nike, Inc.’s COO; and Jeanne Jackson, president of DTC, becoming president of product and merchandising.
Parker said the realignment positions the company to accelerate its innovation agenda, elevate design, optimize category and go-to-market strategies, integrate product creation and merchandising, and sharpen focus on supply chain improvements.
“We spend a lot of time developing our leadership talent, and that's something that never stops,” said Parker. “It allows us to adapt and evolve our competitive offense, and that's what you can expect as this team takes Nike into the future.”
Looking ahead, Nike expects revenue for the first quarter of FY '14 to grow at a mid- to high-single-digit rate. Full-year revenue growth should be near the upper end of its high-single-digit target range, with somewhat stronger growth in the second half of the fiscal year as it builds towards the World Cup in Brazil.
FY14 EPS is projected to grow at a low-double-digit rate, essentially in line with the EPS growth reported for FY '13. First-quarter EPS growth is expected to increase well above this rate due to lower comparative marketing costs.
Q1 gross margin is expected to be essentially flat as continued labor cost inflation and unfavorable FX comparisons offset the benefits of easing raw material costs and higher selling prices. For the fiscal year, gross margin expansion of about 25 basis points is expected, with sequential improvement through the year as higher selling prices, lower discounts, and easing FX headwinds should more than offset the impact of labor cost inflation.
