With a net profit of $1,211.6 million for the financial year ended May 31, Nike delivered a 15 percent increase in the bottom line and a net margin of well over 10 percent on revenues, which grew by 9 percent to $14,954.9 million. The improvement came in spite of a 5 percent drop in net income in the 4th quarter to $332.8 million which was entirely due to an adverse court arbitration involving Converse. Without the related $52 million charge, profit for the period would have risen from $349.5 million for the same quarter a year ago.
Quarterly revenues grew by 10 percent to $4,005.4 million in dollar terms during the latest quarter, but they would have been 2 percentage points higher if currencies had remained the same, and the growth was again driven mostly by the U.S. business. Nike’s European performance improved sharply over the last three months of the financial year, with sales up by 10 percent in constant currencies, including the Middle East and Africa. However, the company’s managers acknowledged that the growth stemmed largely from emerging markets such as Russia and Turkey, while the brand continued to struggle in France and the UK. Orders were up by only 1 percent for the region at the end of the quarter and financial year.
The improvement in the EMEA region for the last quarter was clearly fueled by the World Cup, which pushed Nike’s currency-neutral sales of apparel up by 16 percent for the period, reflecting buoyant sales of replica shirts. This compares with European sales increases of 5 percent for footwear and 21 percent for equipment.
Nike’s troubles in the British market were chiefly caused by price pressure, which has encouraged Nike to cut back its offering in some outlets - to make sure the brand would not be drawn into the ongoing price war. Company executives indicate that they are beginning to feel more confident about an upturn in France, which they identified as the only major European country where Nike lost sales in constant currencies during the past financial year. Sales in Germany have improved.
Due to currency effects, European sales growth in dollars was reduced to 2 percent for the quarter, reaching $1,151.6 million. Shoe sales were down by 3 percent to $672.2 million, while apparel sales shot up by 8 percent to $397.1 million.
For the full year, the European tally showed a sales gain of only 1 percent to $4,326.6 million, or a currency-neutral improvement of 5 percent. European footwear sales were down by 2 percent, while apparel sales rose by 4 percent.
In spite of Nike’s efforts to stay away from price-cutters, its European gross margin was affected by a shift towards lower-margin products in footwear. It declined for the full year and the pain was felt most acutely in the last quarter. Combined with higher marketing expenditures for the World Cup, this caused a drop of 10 percent in the company’s European pre-tax income for the quarter, down to $227.6 million. For the full year, pre-tax profits in Europe were up by 5 percent to $960.7 million.
Europe remained by far the weakest region for Nike, which otherwise achieved another year of ebullient growth. The Nike brand recorded global sales of nearly $3,410 million for the quarter, up by 7 percent. For the full year the increase reached 8 percent, with sales of just over $13 million.
Converse, Nike Bauer Hockey, Hurley and other businesses added $595.5 million worth of sales for the quarter, up 13 percent. They made a huge contribution of $1,947.1 million to group sales for the year – or 12 percent more than in the previous year – and this doesn’t include sales of Converse products under license in Europe, whose wholesale turnover jumped by more than 30 percent in certain key markets.
Converse, Nike Golf and Cole Haan performed strongly during the year, and Hurley went through a turnaround. As whole, Nike’s secondary brands had flat pre-tax earnings of $151.6 million for the year, but they would have risen by 34 percent without the Converse charge.
Geographically, the Nike brand’s most remarkable performance came from the U.S. market, in spite of its already dominant position and of heightened investments by its competitors. The brand saw its U.S. sales rise by another 10 percent to $1,463.7 million for the quarter and by 12 percent to $5,722.5 million for the full year. Nike estimates that it grew about twice as fast as the market in the USA, lifting its American market share by two percentage points.
Nike continued to bulldoze ahead in basketball, as illustrated by sales growth of more than 40 percent for the Jordan brand in the full year, as well as robust sales of the latest Air Max. At the same time, Nike saw its sales jump by 27 percent in U.S. soccer and continued to make progress in running.
Footwear and apparel both performed well in the U.S. market, with respective rises of 14 percent and 9 percent for the full year, despite the expiration of Nike’s license with the National Basketball Association (NBA). This loss was more than compensated by faster growth in branded apparel sales. Unlike the European situation, Nike saw its orders increase by 9 percent in the U.S. market, reflecting a gain in pairs as well as in average prices.
Margins fell in the USA, but this was mostly attributed to the higher input prices which are affecting all industries. Pre-tax profits for the region rose by 11 percent in the quarter and by 10 percent to $1,244.5 million for the full year.
The picture isn’t quite as buoyant in the Asia-Pacific region, as Nike continues to suffer in Japan. Sales dropped by 2 percent in the country for the quarter and the brand’s margins were badly affected by higher discounts. Just as in the UK market, Nike is refusing to get drawn into intense price competition, but it has changed management, cut costs and reviewed its product line for Japan, leading to some recent improvements.
On the other hand, Nike managers are almost lyrical when it comes to China. The company claims to have doubled its sales in the country over the last two years to roughly $600 million. A clear market leader in China, Nike appears to be expanding faster than its competitors.
The company is capitalizing on the strong development of a new Chinese youth culture which Nike nurtured itself in the ‘nineties, mostly around basketball. The results are showing in the streets of Beijing, where youngsters can be seen sporting cornrows and addressing each other in basketball slang. Nike is aptly using its ties with Michael Jordan, its endorsements from the Chinese basketball team and LeBron James : a basketball shoe that was marketed around the player for China only was sold out in less than two hours.
Overall, Nike’s Asia-Pacific sales rose by 4 percent for the quarter to $558.6 million. For the full year the gain amounted to 8 percent and more than 9 percent in constant currencies, taking the regional sales total up to $2,053.8. Then again, the lower margins and higher investments in Japan dragged the entire region’s pre-tax profit down by 30 percent for the quarter. It was up by 3 percent for the year to $412.5 million.
In Canada and the rest of the Americas Nike’s sales increased by 17 percent in the latest quarter to $236.0 million, and the regional pre-tax profit was up by 11 percent to $32.1 million.
Price cuts in Japan and in some European countries, combined with inflated input prices related to higher oil prices and other charges, pushed the whole group’s gross margins down to 43.8 percent for the quarter, a sharp fall compared with 45.2 percent for the same period last year. For the same reasons the full-year gross margin was down by 0.5 points to 44 percent. On the operating side, a 9 percent increase in advertising expenditures, mostly related to the World Cup, had a negative impact on the bottom line, too.
For the current fiscal quarter, Nike expects to deliver high single-digit growth, but gross margins should fall by more than 100 basis points due to a tough comparison with the previous year, while marketing spend will rise sharply in relation with the World Cup. Consequently, Nike warns that earnings per share should be down in the first quarter, but company officials are more optimistic about the balance of the year, predicting higher gross margins and better operating results leading to a mid-double-digit increase in net income for the full year.
Nike’s board of directors has approved a $3 billion share buyback program, doubling the company’s current $1.5 billion, four-year plan. The updated scheme is two years ahead of schedule and expected to be finished next week.
