Europe shines again for Nike, not yet China

About 18 months after the start of its European restructuring plan, the Nike Group appears to be entirely back on track in Europe, as its sales increased robustly in nearly all parts of the continent for the quarter to the end of August. The European upswing was part of a vigorous performance for the first quarter of Nike's fiscal year, with a broad rise in sales as well as orders and gross margin.

Under a new reporting structure adopted from this quarter, the company has included sales of Nike Golf and Hurley in the Nike brand's turnover, while Converse is reported separately. This comes after the divestment of Umbro and Cole Haan, which previously formed the “other brands” group together with Converse, Nike Golf and Hurley. The surf brand has now been included in Nike's action sports category. As for Nike Golf, it will take more advantage of the Nike brand's global infrastructure and investments.

The regional split in sales for the Nike brand includes Nike Golf and Hurley, but not Nike's licensing business that is not part of any geographic operating segment. Such business is reported separately for the Nike brand as Global Brand Divisions.

The entire group's turnover from continuing operations was up by 8 percent to $6,971 million, without much impact from currency exchange rates. Under the new reporting structure and with adjusted prior-year numbers, the Nike brand saw its sales jump to $6,468 million, an increase of 7 percent in constant currencies, with underlying sales rises in all regions other than China.

The Nike brand's turnover in constant currencies climbed by 8 percent in footwear, 6 percent in apparel and 5 percent in equipment. The expansion in apparel mostly came from performance garments, which had a judicious impact on margins. Sales in Nike's own stores jumped by 18 percent for the three months, with a 9 percent rise in comparable stores sales and a 12 percent increase in online sales.

The improvement was led by running, with a new generation of Flyknit footwear and Drifit Knit apparel. The launch of the Hypervenom football boot, hyped as the most successful ever for Nike, contributed to gains in football. It has become the brand's second best-selling boot after the Mercurial. Both running and football enjoyed double-digit sales growth. Basketball is another category that was a stand-out.

Delving into the regional split, the Nike brand's sales in Western Europe climbed by 11 percent to $1,301 million. This was an increase of 8 percent in constant currencies, driven by footwear. Sales advanced at double-digit rate in the U.K. and the German-speaking countries.

Trevor Edwards, who participated in a conference call about Nike's results for the first time as Nike brand president, said the “market reset” in Europe has clearly paid off. The reorganization was partly meant to further centralize operations in Europe and to mimic (parts of) the brand's strategy in North America.

Central & Eastern Europe was another strong region for the group, delivering a sales increase of 12 percent to $366 million. This was still a rise of 10 percent in constant currencies. Russia, Turkey and Poland all delivered double-digit sales growth, and the same applies for the football, running and basketball categories.

The Nike brand's sales remain buoyant in North America, where they increased by 9 percent to $3,135 million. Running and basketball boasted double-digit sales growth, and golf was the only category that failed to grow.

Edwards described the brand's bafflingly persistent rise in North America as an indication of what is to be achieved elsewhere with the brand's category offense strategy – calling for Nike to explore deeply a specific category with distinctive products, retail destinations and consumer activations.

Edwards described the example of women's products in North America. He said 10 million women have downloaded a Nike digital training app and 600,000 are using it every week. This women's training club inspired an own retail concept targeted at women who train (and will buy some stylish products while they're at it), meant to be shared with retail partners at a later stage.

On the other hand, China remains a sluggish market for the Nike brand. Its sales there dipped by 1 percent to $574 million, which was a drop of 3 percent in constant currencies. Sportswear and basketball were the only two categories that managed to lift their sales.

Edwards said that the brand's wholesale comparable performance had declined, but that adjusted stores had done better. Comparable store sales even soared by 20 percent in Nike's own Chinese stores, where it has implemented its sharper merchandising and improvements in its operating model.

Nike expects that its sales in China will increase in the second fiscal quarter and that full-year sales will be at about the same level as last year. Managers repeated their belief in the huge long-term potential of the Chinese market but stressed that the path to recovery would probably not be straight, implying that the results may not improve regularly from one quarter to the next.

The sales increase of 1 percent to $902 million in the emerging markets was relatively weak, even though it amounted to a rise of 5 percent in constant currencies. Brazil and Argentina yielded strong sales increases, but results were weaker in Korea and even more so in Mexico, caused by shipping delays after a change in distribution centers. Without this glitch, sales in the region would have increased at double-digit pace.

The Japanese sales reported by the Nike brand reached $158 million, which was a decline of 20 percent, but this was entirely due to exchange rates as underlying sales inched up by 1 percent.

The Converse brand's turnover advanced by 18 percent to $494 million, a rise of 16 percent in constant currencies. The sales hike was driven by buoyant demand for Converse in the largest markets where it handles its own distribution, from the U.S. to the U.K. and China.

The company was even more pleased with its gross profit margin of 44.9 percent for the quarter, up by 1.2 percentage points, as the product mix continued to shift toward more valuable performance products and raw material prices eased. It was aided by higher average prices and lower discounts, as well as the growth of Converse and own retail sales.

Marketing outlays were sharply reduced compared with last year, when the European football championships and the London Olympics unfolded. Overall selling and administrative expenses reached 29.5 percent of sales, down from 31.8 percent for the same quarter the previous year. The group's Ebit landed at $1,048 million, up by 31 percent.

The impact of reduced marketing costs was strongest in Europe, as Ebit for the Nike brand soared by 25 percent to $265 million in Western Europe and by 50 percent to $81 million in Central and Eastern Europe. The brand's Ebit for North America amounted to $813 million, which was another increase of 26 percent, while improvements were smaller in China and Japan. Ebit for the Nike brand in emerging markets retreated by 5 percent to $210 million, mostly due to unfavorable currency exchange rate changes. Ebit for the Converse brand alone soared by 36 percent to $169 million. Nike ended the three months with net income of $780 million, up by 33 percent.

Orders remain very healthy, with an increase of 10 percent in constant currencies for the Nike brand as a whole (this time excluding Nike Golf and Hurley). The rise comprises an increase of 7 percent in units and 3 percent in average selling prices. Running and football products both enjoyed double-digit rate increases in orders.

The rise in orders includes increases of 27 percent in Central and Eastern Europe and 12 percent in Western Europe and North America. The rises were more modest in other regions, up by 7 percent in emerging markets, 2 percent in China and 1 percent in Japan.

Nike expects sales for the second quarter and the full fiscal year to grow at a high single-digit rate, which is a little below prior expectations due to unfavorable exchange rates. The gross margin should expand by about 0.5 percentage points for the second quarter. The factors that improved the margin in the first quarter will continue to play out but Nike will have to offer higher discounts to clear inventories in Mexico and to pay for the start-up costs of its U.S. distribution center. The gross margin should also increase by about 0.5 percentage points for the full year.