Nike announced higher-than-expected increases in profits and revenues for its first fiscal quarter ended on Aug. 31, despite currency headwinds and the trade tensions between China and the U.S. The company's share price jumped by 5 percent to an all-time high following the release of its results.
Sales increased by 7 percent from the year-ago quarter to $10.66 billion, or by 10 percent in constant currencies. Net income jumped by 25 percent to $1,370 million.
The group's gross margin expanded by 1.5 percentage points to 45.7 percent, or one full percentage point more than previously predicted, thanks to higher average selling prices and a growing proportion of direct-to-consumer (DTC) sales. On the expense side, investments in demand creation were limited at 6 percent of sales, despite higher absolute spending on advertising and sports marketing.
The operating margin (Ebit) grew by 1.9 percentage points to 14.8 percent across the group. It fell slightly to 25.6 percent in North America and remained flat at 25.4 percent in the rest of the Americas and Asia-Pacific, excluding Greater China, where it jumped by 3.4 percentage points to 39.8 percent. It increased by 2.8 percentage points to 22.0 percent in Europe, the Middle East and Africa (EMEA).
As before, the management attributed this performance to targeted strategic investments aimed at accelerating Nike's digital transformation, with online sales soaring by 42 percent. It said its strategy to focus more on the consumer with its “complete offensive,” also in terms of product development and personalization, paid off in a “particularly volatile” macroeconomic and geopolitical environment.
The Nike App has become the largest and fastest-growing platform in the group's portfolio, growing by almost a triple-digit rate in the quarter. It is now available in 21 countries, including a further 13 countries in Europe where it was introduced during the period, and it will go live in China by the end of the year. The SNKRS app had a triple-digit growth.
As the company puts it, the Nike and SNKRS apps are meant to create new digital personal experiences, building out a cloud-based back end to support higher consumer demand, which will in turn create a larger scale. More than 50 percent of the growth in digital sales came from members.
Nike continues to invest in brick-and-mortar retailing as well. The management highlighted the Nike Fit foot scanning technology, that is currently available in store in all North America locations and is moving into Europe and Japan. The group also plans to integrate the Nike App at retail in more Foot Locker doors in North America and to bring “new experiences” to the market through Zalando in Europe and Top Sports in China later this fiscal year.
The latest quarter's revenues were lifted by the international business, which grew by 16 percent, led by women's in both footwear and apparel. China was the main driver of growth, with sales up by 22 percent to $1,700 million. Nike's profit in the country rose by 22 percent, or by 27 percent in constant currencies, despite the additional customs duties imposed on shoes and apparel. The impact of the digital channel in China has been “nothing short of extraordinary” with a whopping 70 percent increase during the quarter, partly increased by strategic partnerships with Tmall and WeChat.
In the EMEA region, the Nike brand's sales went up by 6 percent in dollars and by 12 percent in local currencies, with growth across all categories, helped by strong double-digit growth in the digital channel. The management said it extended its lead in Europe, noting that it is rated as the favorite sports brand in all key cities. The business is growing at strong double-digit rates in London, Berlin and Milan, it added.
While Nike Direct is a key driver, strategic partnerships with JD Sports Fashion, Zalando and Pro Direct are also contributing to the strong sustained growth in Europe through sharing inventories with them.
In Asia-Pacific & Latin America, revenues grew by 6 percent, or by 13 percent in constant currencies, with a jump of nearly 50 percent in digital sales, driven by basketball.
In North America, revenues advanced by 4 percent, led by a 30 percent jump in digital and high-single-digit growth from key wholesale partners.
By category, footwear and equipment both went up by 11 percent in constant currencies, while apparel rose by 9 percent. Among the key products, the management mentioned the Air Max React 270, which was created by blending Air Max and React and has multiple bold color combinations. The model led to the largest gains in footwear revenues for the quarter. Another strong style was the Air Max 200, which features a layered upper and a new visible Air Sole unit.
Overall, the Nike brand rose by 10 percent in constant currencies, reaching a level of $10.09 billion, driven by double-digit increases in women's products, sportswear (lifestyle clothing and footwear) and the Jordan Brand.
In the performance segment, Nike experienced a rebound in basketball in the quarter, especially outside its home market. The brand's strong visibility during the Women's World Cup of football led to a 400 percent boost in sales of the related jerseys as compared to the same event four years ago. In the running segment, Nike launched its new Joyride platform to reach out to more casual participants.
Meanwhile, the Converse brand's sales were up by 8 percent on a currency-neutral basis in the quarter, rising to $555 million, boosted by double-digit growth in Asia and through the digital channel globally. The brand returned to growth in Europe.
Nike's gross margin increased by 1.5 percentage points to 45.7 percent, mainly due to higher average selling prices and margin expansion in Nike Direct, partially offset by impacts from changes in foreign currency exchange rates and higher product costs.
The group's guidance for the full year calls for high single-digit growth in revenues. A gain of between 0.50 and 0.75 percentage points is expected for the gross margin. The management indicated that it was not particularly concerned by the tariff dispute with China, where it now sources only about a quarter of its products.
