Nike's sales flattened in North America and its income slipped for the last quarter of its fiscal year, to the end of May, but the group still managed ample increases in sales and profits for the fiscal year, and demand remains robust.

The Nike group's sales in the quarter increased by 6 percent to $8,244 million, with a rise of 9 percent in constant currencies. Sales for the Nike brand alone inflated by 5 percent to $7,725 million, up by 8 percent in constant currencies, as the flat turnover in the North American market was more than compensated by double-digit growth in Western Europe, Greater China, Emerging Markets and Japan.

The rise was driven by sportswear, football and the Jordan brand. Nike's footwear sales were up by 9 percent in constant currencies for the quarter, compared with 7 percent for apparel and a drop of 3 percent for equipment.

It has been previously suggested that Nike should some of its price points in North America in the running and basketball categories. But in a conference call last week, Nike's management attributed the relatively weak performance in North America for the quarter to a distorted comparison with the previous year, when it was catching up with delays in deliveries caused by port strikes. Nike's operating income (Ebit) for North America dropped by 12 percent to $936 million for the quarter, and clearance in North American inventories affected the group's gross profit margin.

The Nike brand fared better in Western Europe, where sales surged by 19 percent to $1,502 million. The rise included double-digit growth in all territories, and increases in all key categories, led by sportswear, football, the Jordan brand and running. Own retail sales in Western Europe surged by 26 percent for the quarter.

The underlying sales rise of 23 percent in Greater China for the quarter was supported by upgrades in some of the Nike brand's stores. Own retail sales were up by 44 percent, with strong expansion in online sales as well as in the Nike brand's own Chinese stores. The quarter saw the opening of a running store in Chengdu, which is to be replicated in other locations.

Nike Consolidated Income Statement

(Million $, Year ended May 31)

 

2016

2015

%
Change

REVENUES

32,376

30,601

5.8

Cost of Sales

17,405

16,534

5.3

Gross Profit

14,971

14,067

6.4

Gross Margin

46.2%

46.0%

 

SG&A

10,469

9,892

5.8

Net Interest (Income) Expense

19

28

-32.1

Other (Income) Expense, net

-140

-58

 

Pre-Tax Income

4,623

4,205

9.9

Tax

863

932

-7.4

NET INCOME

3,760

3,273

14.9

Earnings/Share (Diluted)

2.16

1.85

16.8

The Converse brand raised its sales to $513 million, up by 18 percent in constant currencies, but this was chiefly due to the fact that sales were shifted from the fourth to the third quarter in the previous fiscal year.

The group's gross margin was off by 0.3 percentage points to 45.9 percent for the quarter. While average selling prices were on the rise, it was faced with higher product costs, inventory clearance costs in North America and unfavorable exchange rates. Nike's net income slipped by 2 percent to $846 million.

For the fiscal year to the end of May, the Nike group achieved a sales jump of 6 percent to $32,376 million, with an increase of 12 percent in constant currencies. The company is edging closer to its target to build up sales of $50 billion by 2020.

The Nike brand alone generated a turnover of $30,507 million, up by 13 percent in constant currencies. Sportswear remained the largest category with wholesale equivalent sales of $7,513 million, up by 22 percent in constant currencies. Running is by far the largest sports category, with wholesale equivalent sales of $5,017 million, an underlying increase of 10 percent. The Jordan brand's turnover of $2,753 million makes it much bigger than the Nike brand's basketball business at $1,378 million, and it has been growing much faster as well, with an underlying sales increase of 21 percent for Jordan and just 2 percent for Nike basketball. Golf is the only category that was down in constant currencies, off by 6 percent.

Wholesale equivalent sales for football reached $2,143 million, down 5 percent in reported terms and up 7 percent in constant currencies. That's significantly below the €2.5 billion in sales that the Adidas Group is forecasting for its football business this year, claiming gains in footwear market share. While the reported Nike football sales cover the run-up to the European championships, the Adidas forecast also includes sales during (and after) the championship.

Nike Brand Sales

(Million $, Year ended May 31)

 

2016

2015

%
Change

Sportswear

7,513

6,604

13.8

Running

5,017

4,863

3.2

Jordan Brand

2,753

2,329

18.2

Men's Training

2,611

2,545

2.6

Football (Soccer)

2,143

2,250

-4.8

NIKE Basketball

1,378

1,385

-0.5

Women's Training

1,344

1,281

4.9

Action Sports

711

737

-3.5

Golf

706

769

-8.2

Others

3,073

3,070

0.1

       

Total

27,249

25,833

5.5

The Nike brand's turnover combined a rise of 9 percent in constant currencies for sales to wholesale customers with a 25 percent increase in own retail sales to $7,857 million. This included a jump of 51 percent in online sales, store openings and a 10 percent rise in comparable store sales. Nike ended the fiscal year with 919 own stores, up from 832 at the end of May 2015.

The Nike brand's continued rise was fueled by sportswear, running and Jordan products. Footwear led the way, with a sales increase of 15 percent in constant currencies, compared with a rise of 11 percent for apparel and a decline of 2 percent for equipment.

North America delivered a sales increase of 7 percent to $14,764 million for the year but several other markets did better. Sales were up 3 percent to $5,884 million in Western Europe, which was a rise of 14 percent in constant currencies.  Nike remains buoyant in Greater China, where sales soared by 27 percent in constant currencies, reaching $3,785 million, and the brand raised its operating income by 38 percent.

Emerging Markets was another standout for the year, with sales increasing by 13 percent in constant currencies, led by the Southern Cone (the southernmost part of Latin America), Mexico and the Pacific, while Brazilian sales dipped. Albeit operating from a smaller basis, Nike managed double-digit sales increases in constant currencies in Central and Eastern Europe as well as Japan. The Converse brand's sales dipped by 1 percent to $1,955 million for the fiscal year, but that amounted to an increase of 2 percent in constant currencies.

The Nike group's gross margin crawled up by 0.2 percentage points to 46.2 percent for the fiscal year, pushed up by higher average selling prices and expansion in own retail sales. Marketing spend was up by just 2 percent to $3.3 billion but operating overhead expenses inflated by 8 percent to $7.2 billion, due to the growing retail business and investments in infrastructure. Nike ended the fiscal year with net income of $3,760 million, an increase of 15 percent. Nike's inventories amounted to $4.8 billion at the end of May, up by 12 percent.

Futures orders were up by 11 percent in constant currencies at the end of fiscal year. They advanced at double-digit rates in all regional markets other than Central & Eastern Europe and North America, where they firmed up by 6 percent.

Nike Regional Sales & EBIT

(Million $, Year ended May 31)

 

2016

2015

%
Change

North America

Footwear

9,299

8,506

9.3

Apparel

4,746

4,410

7.6

Equipment

719

824

-12.7

Total Sales

14,764

13,740

7.5

EBIT

3,763

3,645

3.2

Western Europe

Footwear

3,985

3,876

2.8

Apparel

1,628

1,555

4.7

Equipment

271

278

-2.5

Total

5,884

5,709

3.1

EBIT

1,434

1,275

12.5

Central & Eastern Europe

Footwear

882

827

6.7

Apparel

463

495

-6.5

Equipment

86

95

-9.5

Total

1,431

1,417

1.0

EBIT

289

249

16.1

Greater China

Footwear

2,599

2,016

28.9

Apparel

1055

925

14.1

Equipment

131

126

4.0

Total

3,785

3,067

23.4

EBIT

1,372

993

38.2

Japan

Footwear

570

452

26.1

Apparel

228

230

-0.9

Equipment

71

73

-2.7

Total

869

755

15.1

EBIT

174

100

74.0

Emerging Markets

Footwear

2,536

2,641

-4.0

Apparel

947

1,021

-7.2

Equipment

218

236

-7.6

Total

3,701

3,898

-5.1

EBIT

892

818

9.0

       

Global Brand Divisions

73

115

-36.5

EBIT

2,596

(2,267)

-214.5

       

Total NIKE Brand

30,507

28,701

6.3

EBIT

5,328

4,813

10.7

       

Converse

1,955

1,982

-1.4

EBIT

487

517

-5.8

       

Corporate

(86)

(82)

-

EBIT

(1,173)

(1,097)

6.9

       

TOTAL NIKE GROUP

32,376

30,601

5.8

Total EBIT

4,642

4,233

9.7

 

Nike Brand Futures Growth

As of May 31, 2016 (in %)

Geography

Reported
Futures
Orders

Excluding
Currency
Changes

North America

6

6

Western Europe

8

11

Central and Eastern Europe

3

7

Greater China

19

24

Japan

24

15

Emerging Markets

3

13

Total

8

11

The Nike group predicts that its sales will increase at a high single-digit rate for the current fiscal year, to the end of May 2017, with sales growth in the high-single to low-double digits in constant currencies. Among their projects, Nike managers talked about leveraging the Jordan brand across multiple categories and accelerating the growth of its women's business. Wholesale equivalent sales for the women's category were up by 17 percent in constant currencies for the last fiscal year, reaching $6,296 million, compared with $15,410 million for the men's business, which was up by 11 percent in constant currencies.

The Nike group's gross margin is predicted to expand by 0.3 to 0.5 percentage points for the year, pushed by higher average selling prices, more efficient production, lower input costs and growth in Nike's online store sales. Some analysts were reassured to hear that, after the North American clearance that impacted the gross margin in the last quarter, inventory has been cleaned up in the full-priced channel. However, these improvements should be mitigated by higher labor costs and unfavorable currency exchange rates. 

The new fiscal year is expected to start with mid-single digit sales expansion in the first quarter, albeit accompanied by a decline of 1.0 percentage point in the gross margin, due to unfavorable exchange rates. The marketing spend is to increase around the Rio Olympics and the European Football Championships.