A convincing pick-up in its sales on the British market contributed to substantial expansion for Nike in Europe during the three months ended on Aug. 31. Nike reported last week a sales jump of 9 percent in local currencies in the Europe, Middle East and Africa (EMEA) region for the period, and its management insists that the rise came to a large extent from West European markets – and not only from the region’s emerging economies. Yet more remarkably, orders from the area jumped by 17 percent at the end of the period, or by 14 percent in constant currencies, with double-digit increases in both apparel and footwear.
Sales in the UK increased by about 10 percent on a currency-neutral basis for the three months, after an extensive clean-up of Nike’s inventories and distribution over the last quarters, indicating a widening of the brand’s leadership in the market. Its recovery was driven to a large extent by soccer: Nike UK has launched home and away kits for a newly-contracted club, Aston Villa, and it has been very successful with an anniversary home kit for Celtic Glasgow, launched to celebrate the 40th anniversary of the Scottish club’s victory in the European Cup.
Now into their fourth generation with the Laser range, Nike’s Total 90 football-inspired street shoes are still going strong in the UK, where the company appears to have fixed some of its problems in the sports culture segment, for example with the launch of its vintage running collection in Size!, a lifestyle-oriented retailer belonging to the John David Group.
Consisting of Spain and Portugal, Iberia is another European market that was singled out by Nike managers as an out-performer for the quarter. The sales of Nike’s French subsidiary, which took abundant flak last year, have also firmed up a little.
As a whole, the EMEA region reported sales of $1,448 million for the quarter, up by 16 percent in reported dollars. Soccer, running, sportswear and women’s training were the leading contributors to the increase. Footwear sales grew by 17 percent to $791.9 million in EMEA, compared with rises of 16 percent for apparel to $567 million and 14 percent for equipment to $118.8 million. Pre-tax income for the region improved even faster, rising by 21 percent to $375.5 million.
Nike’s strength in Europe, Asia and Latin America made up for on-going pressure in the U.S. region, where the company’s sales rose by just 2 percent to $1,638 million. While the Nike brand had some joy there with high-end running products and women’s ranges, it suffered from the decline of the basketball category and the general economic unease in the market, particularly in the shopping malls. The company’s footwear sales were up by 4 percent in the country, but apparel and equipment were both down by 1 percent. As for U.S. futures, they increased by 3 percent.
While acknowledging concerns about the U.S. market at large, Nike’s managers stress that they regard this as an opportunity to grab market share in the short term. They have implemented several structural changes, such as a focus on three key categories, that should enable the company to react more quickly to changes in market demand.
Revenues from Nike’s own retail stores in the USA were up by 13 percent overall, and by 4 percent on a comparable basis. The company has been reviewing its retail operations and decided to widen the ranges offered in some stores. Two women-only stores have been converted to multi-gender stores, and there are probably more switches to come, although Nike executives were quick to point out in a conference call last week that they would not give up the women’s stores altogether. E-commerce, which now represents around 1 to 2 percent of sales, has become a priority for the next months.
Pre-tax income for the U.S. market was off by by 2 percent to $347.3 million, due to lower margins. In footwear, for example, sales enjoyed a single-digit rise, boosted by the Jordan range and parts of the sports culture range. On the other hand, prices dropped in the high single digits, chiefly due to lower sales in the high-margin basketball category. In apparel, sales of Jordan-related apparel softened, but this was partly offset by growth for Nike Pro.
The rest of the Americas generated a sales increase of 15 percent to $279.5 million for the company, or 11 percent in constant currencies. Double-digit sales growth was recorded in all business units, with particularly impressive expansion in Argentina and Mexico.
Sales in the Asia-Pacific region jumped by 22 percent or $630.8 million, or by 20 in constant currencies. This included a sales decline of 5 percent in Japan, but Nike’s managers indicate that the brand and the market’s situation have strongly improved. Korean sales were up by 25 percent and the company enjoyed a whopping sales increase of 50 percent in China – apparently widening its lead over Adidas in the last months. Pre-tax income was equally juicy, up by 52 percent to $159.5 million.
Other brands owned by the group saw their sales increase by 12 percent to $628.7 million, pushed by Converse, Nike Golf and Nike Bauer Hockey. Pre-tax income for these other brands reached a total of $95.2 million, up by 30 percent excluding an extraordinary gain of $14.2 million pocketed during the same period last year.
Adding it all up, the company’s sales climbed by 11 percent to $4,655 million for the 3 months. Excluding currency effects, sales would still have increased by 8 percent. The group’s gross margin grew by 70 basis points to 44.8 percent on account of lower freight charges, stronger sales of high-margin products and currency effects, which accounted for 30 basis points of the improvement.
Net income rose by 51 percent to $569.7 million, partly due to a $100 million foreign tax credit. Without it, the bottom line would have still grown by 24 percent during the period
Total future orders grew by 11.5 percent overall, or by 10 percent on a same-currency basis. Nike confirmed its forecasts but somewhat altered their basis. The company now believes that it will attain high single-digit or low double-digit revenue growth for the full fiscal year. On the other hand, its gross margin should only rise moderately and SG&A expenses should grow slightly faster than revenues, chiefly due to investments in retailing. Earnings per share for the second quarter are now projected to be flat .