While the brand was hurt by the continued cleanup of its business in China, advances in nearly all other regions enabled the Nike group to report ample growth in both sales and profits for the three months until the end of May, which was the last quarter of its financial year.

The company's sales jumped by 7 percent to $6,697 million for the quarter, amounting to an increase of 9 percent in constant currencies. The comparison is based on continuing operations, excluding Umbro and Cole Haan, which have been divested.

The Nike brand's sales alone were up by 7 percent to $5,975 million, equivalent to a rise of 8 percent in constant currencies for the quarter. Charlie Denson, outgoing president of the Nike brand, was abundantly praised during the company's conference call last Thursday for this performance as well as his contribution to the remarkable expansion of the Nike brand during his tenure of more than three decades at the company. As reported in our previous issue, Denson will retire in January next year but Trevor Edwards is already taking over as president of the Nike brand as of today. Denson, who was warmly thanked by colleagues as well as analysts, said that he would quit working altogether and enjoy time with his family.

The Nike brand's quarterly turnover was up in performance running, basketball and training, but it declined slightly in action sports, sportswear and football, compared with a strong quarter last year, ahead of the European football championships. In constant currencies, sales expanded by 8 percent for both footwear and apparel, and by 13 percent for equipment.

While Nike continued to improve its inventory situation on the Chinese market, working in partnership with retailers, the brand's sales in the region remained flat at $669 million, and they dropped by 1 percent in terms of renminbi. This compares with higher declines in Chinese sales of 12 percent in the second quarter and 10 percent in the third quarter in constant currencies.

Nike's Chinese sales advanced at a double-digit rate in running and basketball but they decreased in other categories, particularly in sportswear. In the local currency, they fell by 1 percent for both footwear and apparel and by 2 percent for equipment and accessories. Still excluding currency changes, orders in China were flat at the end of the quarter.

Mark Parker, the company's president and chief executive, reiterated that the Nike brand's return to sustained growth in China would require discipline and patience. The company emphasized that it was hard to predict when the downturn would come to an end, but it anticipates that its sales in China should stabilize in the second half of its current fiscal year. Sales in the first half, runnign until the end of November, should still be down.

Nike is actively striving to improve the productivity of its Chinese franchised stores, with faster product flow and enhanced merchandising. The efforts are already paying off in its own standard and factory stores, where comparable sales have jumped at a double-digit rate, and in the refitted stores of Nike's Chinese retail partners.

The performance stores opened for running and basketball during the fiscal year have also yielded promising results. Nike is preparing for more excitement around its basketball products as LeBron James, Kobe Bryant and Kevin Durant will be in China this summer.

Western Europe was the only other region where Nike's sales were weak for the quarter, down by 1 percent to $1,024 million. Sales in this region were flat in constant currencies, as an 8 percent sales increase in footwear made up for drops of 15 percent in apparel and 10 percent in equipment, probably due at least partly to weaker football replica sales.

Nike suffered sales declines of more than 20 percent in Italy and Iberia. The company said that this was compensated by double-digit sales expansion in Germany, Austria and Switzerland.

Sales of running products enjoyed double-digit growth and basketball sales more than doubled, while sales in other categories declined. Nike's own retail sales in western Europe jumped by nearly 40 percent.

Central and Eastern Europe was apparently unaffected by the tough comparison with last year, when Poland and Ukraine were preparing to host the European championships. Nike's sales in the region advanced by 9 percent to $361 million, up by 11 percent in constant currencies. The increase was driven by Turkey and Russia, with double-digit sales increases in all major categories except sportswear and action sports, which were down.

North American sales jumped by 12 percent to $2,714 million. The Nike brand's sales inflated by more than 20 percent in constant currencies for apparel and equipment and they advanced by 8 percent for footwear. Nike's own retail sales in North America were up by 16 percent, including a rise of 11 percent in comparable store sales.

Emerging Markets were another region where Nike powered ahead, with a sales rise of 10 percent to $960 million, up by 16 percent in constant currencies. The company pointed to Brazil, Argentina and Mexico as significant contributors, adding that sales were up in football, running and action sports. The popular unrest that has been shaking Brazil in the last weeks has not affected Nike's business in the country so far.

Japanese sales were down by 11 percent to $214 million in reported terms, but they increased by 4 percent in yen, driven by a rise of 10 percent in footwear sales.

The Other Businesses unit, encompassing Converse, Hurley and Nike Golf, saw its sales jump by 10 percent to $732 million. The group said that all brands had contributed to the increase for the quarter.

The group's gross margin improved by 1.1 percentage points to 43.9 percent, due to declining pressure on material costs, some price increases and favorable comparisons with the same quarter last year, when Nike made heavy investments in its digital business. It was hit by an unexpected assessment by customs in Emerging Markets.

Nike Regional Sales & EBIT

(Million $, Year ended May 31)

 

 

2013
2012 %
Change

NIKE Brand

     

North America

Footwear

6,687

5,887

14

Apparel

3,028

2,482

22

Equipment

672

470

43

Total Sales

10,387

8,839

18

EBIT

2,534

2,030

25

Western Europe

Footwear

2,646

2,526

5

Apparel

1,261

1,377

-8

Equipment

221

241

-8

Total

4,128

4,144

-0

EBIT

540

597

-10

Central & Eastern Europe

Footwear

714

671

6

Apparel

483

441

10

Equipment

90

88

2

Total

1,287

1,200

7

EBIT

259

234

11

Greater China

Footwear

1,493

1,518

-2

Apparel

829

896

-7

Equipment

131

125

5

Total

2,453

2,539

-3

EBIT

809

911

-11

Japan

Footwear

429

439

-2

Apparel

301

325

-7

Equipment

61

71

-14

Total

791

835

-5

EBIT

133

136

-2

Emerging Markets

Footwear

2,570

2,387

8

Apparel

918

815

13

Equipment

230

209

10

Total

3,718

3,411

9

EBIT

1,011

853

19

     

Global Brand Divisions

117

111

5

EBIT

(1,396)

(1,200)

16

     

Total NIKE Brand

22,881

21,079

9

EBIT

3,990

3,561

12

     

Other Brands

2,500

2,298

9

EBIT

456

385

18

     

Corporate

(68)

(46)

48

EBIT

(1,177)

(917)

28

     

TOTAL NIKE GROUP

25,313

23,331

8

Total Earnings before interest and taxes

3,269

3,029

8

The group's spending on marketing decreased by 13 percent to $642 million for the quarter as compared to the same quarter last year, ahead of the European football championships and the London Olympics.

The Nike group's Ebit came in at $905 million, an increase of 23 percent. It jumped by 29 percent in North America, by 30 percent in Emerging Markets and by 18 percent in Central and Eastern Europe, but inched up by 2 percent in Western Europe and declined by 2 percent in both China and Japan.

Nike Consolidated Income Statement

(Million $, Quarter ended May 31)

 

2013

2012

%
Change

REVENUES

6,697

6,236

7.4

Cost of Sales

3,757

3,567

5.3

Gross Profit

2,940

2,669

10.2

Gross Margin

43.9%

42.8%

 

SG&A

2,022

1,896

6.6

Net Interest Expense

3

1

200.0

Other Income , net

13

37

-64.9

Pre-Tax Income

902

735

22.7

Tax

206

176

17.0

NET INCOME

668

549

21.7

Earnings/Share (Diluted)

0.76

0.60

26.7

The group ended the quarter with net income from continuing operations of $696 million, up by 25 percent. Adding a net loss of $28 million from discontinued operations, the group's net income was still up by 22 percent to $668 million.

For the full year, the Nike group's turnover from continuing operations climbed by 8 percent to $25.3 billion, up by 11 percent in constant currencies. This tally included an underlying sales rise of 11 percent for the Nike brand, which saw its sales expand by 9 percent to just under $22.9 billion in reported terms.

Most remarkably, the brand achieved another sales hike of 18 percent in constant currencies to nearly $10.4 billion in North America – meaning that it added sales of more than $1.5 billion in this region alone for the year.

Nike has repeatedly described North America as an example of the sales amplification it could achieve with its category offense strategy, but it has yet to fully implement these tactics and reap the benefits in other markets.

Still in constant currencies, it managed sales increases of 5 percent in Western Europe, 12 percent in Central and Eastern Europe and 16 percent in Emerging Markets. Sales crawled up by 1 percent in Japan, and they contracted by 5 percent in China, after the reduced decline of the last quarter.

The Nike brand's own retail sales climbed by 23 percent to $4.3 billion for the fiscal year, including an increase of more than 30 percent for online sales. This compares with a rise of 6 percent for wholesale sales, up by 8 percent in constant currencies. Own retail sales have thus reached 18.9 percent of the Nike brand's turnover.

Nike Consolidated Income Statement

(Million $, Year ended May 31)

 

2013

2012

%
Change

REVENUES

25,313

23,331

8

Cost of Sales

14,279

13,183

8

Gross Profit

11,034

10,148

9

Gross Margin

43.6%

43.5%

 

SG&A

7,780

7,065

10

Net Interest (Income) Expense

(3)

4

-175

Other (Income) Expense, net

(15)

54

-

Pre-Tax Income

3,272

3,025

8

Tax

808

756

7

NET INCOME

2,485

2,223

12

Earnings/Share (Diluted)

2.69

2.42

11

In wholesale equivalent revenues, the Nike brand's sales of running products were up by 16 percent to $4,274 million, forming by far the largest sports category for the brand. Second came basketball with sales of $2,627 million, up by 21 percent. Football generated sales of $1,931 million for the Nike brand, up by 4 percent in dollars and by 9 percent in constant currencies. Action sports delivered sales of $495 million, which was flat in dollars and up by just 2 percent in constant currencies. Sportswear was the largest category overall, with sales of $5,637 million, posting a decline of 2 percent in reported terms and a slight increase in constant currencies.

Other Businesses added sales of exactly $2.5 billion, an increase of 9 percent both in dollars and in constant currencies. Converse's sales reached $1,449 million, up by 9 percent, including double-digit sales increases in China and the U.K., where the brand took over its own distribution. The same sales increase of 9 percent was recorded at Nike Golf, which ended the year with a turnover of $791 million. As for Hurley, its sales advanced by 5 percent to $260 million – better than the action sports industry at large, as executives pointed out.

Nike Group Sales by Brand, Category

(Million $, Year ended May 31)

 

2013

2012

%
Change

NIKE BRAND (Wholesale-equivalent)

Running

4,274

3,696

16

Basketball

2,627

2,169

21

Football (Soccer)

1,931

1,862

4

Men's Training

2,380

2,064

15

Women's Training

1,067

1,011

6

Action Sports

495

497

-0

Sportswear

5,637

5,741

-2

     

Others*

2,477

2,384

4

     

Total

20,888

19,424

8

     

NIKE AFFILIATE BRANDS

Converse

1,449

1,324

9

Nike Golf

791

726

9

Hurley

260

248

5

     

Total

2,500

2,298

9

     

*Others include all other categories and certain adjustments that are not allocated at the category level.

The group's gross margin for the full fiscal year was up by 0.1 percentage points to 43.6 percent. There was a shift in sales toward lower-margin markets, exchange rates were unfavorable and Nike had to offer higher discounts, particularly in China, but all of this was offset by lower material costs and price increases.

The Nike group's Ebit improved by 8 percent to $3,269 million for the year. Sharp increases in North America and Emerging Markets more than compensated Ebit declines of 11 percent in China and 2 percent in Japan. The group ended its fiscal year with net income from continuing operations of $2.464 million, which was a rise of 9 percent. Discontinued operations, consisting of Umbro and Cole Haan, added net income of $21 million, which is the net gain on the sale of these two companies.

The Nike brand's future orders were up by 8 percent at the end of the quarter, both in dollars and in constant currencies. Excluding currency changes, apart from the stable situation in China, orders also remained flat in the Western Europe region, but they jumped by 12 percent in North America, Central and Eastern Europe and Emerging Markets, and they were up by 6 percent in Japan. 

Nike Futures Orders

for Delivery from June to November 2013

(% Changes)

REGION

In Dollars

In Local Currencies

   

North America

12

12

Western Europe

2

0

Central and Eastern Europe

14

12

Greater China

3

0

Japan

-17

6

Emerging Markets

12

12

Total

8

8

The company said that it expected its turnover to grow at a mid- to high single-digit rate for the first quarter of the current fiscal year. This growth is expected to accelerate in the second half of the year as it moves toward the football World Cup in Brazil, so that sales should climb at a high single-digit rate for the full year.

The gross margin is expected to remain roughly flat in the first quarter, affected by unfavorable exchange rates and increasing labor costs, particularly in Indonesia. However, the gross margin should inch up by about 25 basis points for the full year, due to price increases, lower discounts and less pressure from currency exchange rates. Nike also pointed to improvements in production technology, which should lead to more efficient processes.

Sales, general and administrative expenses should inflate at a low single-digit rate in the first quarter, since Nike spent heavily on marketing in the same quarter last year around the European football championships, the London Olympics and the start of its deal with the National Football League (NFL). For the three other quarters, SG&A expenses should increase at a rate in the low teens. For the full year, they would then increase at a low double-digit rate, slightly above the rise in sales.

Earnings per share are expected to expand at a low double-digit rate for the full year. They should rise much faster in the first quarter, due to the decrease in marketing spend.