Key words are China, football and the dollar exchange rate. They and ongoing efforts on the product and on the supply chain help to explain the 32 percent increase in net profit posted by the industry leader for the 3rd quarter ended Feb. 29, up to a level of $463.8 million. Revenues jumped by 16 percent to $4.5 million, prompting a statement by the management that its 2011 target of $23 billion in sales remains within reach, although changes in currency exchange rates were responsible for 6 percentage points of the increase.
Nike crossed several billion-dollar landmarks during the quarter. Sales of the Nike brand alone in China grew by more than 50 percent, pushing its sales in the country over the $1 billion barrier for the last 12 months earlier than expected and earlier than the competition. Its footwear business in the USA also reached the $1 billion level for the first time, but just for the quarter. One billion dollars in free cash flow was generated during the first nine months of the financial year.
Thanks in part to the lower value of the dollar, the company generated almost as much pre-tax profit in Europe, the Middle East and Africa (EMEA) as in the USA during the quarter. It grew by 31 percent to $334.3 million on sales of $1,384.3 million, indicating a higher profit margin than in the USA, where it rose by 17 percent to $347.3 million.
The Nike brand’s sales in the EMEA increased by 25 percent in dollars and by 10 percent in local currencies, the same as in Latin America and Canada on a constant currency basis. In the Asia-Pacific region, currency-neutral sales went up by 20 percent and the pre-tax profit climbed by 46 percent to $193.0 million.
In Europe, Nike managed to increase its sales in the UK by 11 percent, after cleaning up the distribution and managing inventory and pricing. Strong growth was reported also in Germany and in Northern Europe. Sales in the emerging markets of the EMEA region grew by 34 percent, with double-digit gains in every country led by Russia, Turkey and Poland.
As for other parts of the world, the company says it recorded growth of more than 15 percent in Argentina, Brazil and Mexico, while the more mature and difficult Japanese market showed a 4 percent increase in the local currency. Nike now has nearly 3,500 stores in China, after almost 900 openings in the 3rd quarter alone.
Nike claims that the uncertain economic situation in the USA is playing in its favor, as customers concentrate on strong brands. While its apparel sales increased in that market, footwear sales were essentially flat in volume but rose by 5 percent in value, generating two extra percentage points of gross margin and raising Nike’s market share to about 40 percent. One factor was the brand’s ability to re-direct close-out merchandise to its growing network of factory outlets.
Among the group’s other brands and businesses, Hurley boosted its sales by 33 percent while Converse continued to do wonders during the quarter, raising revenues and pre-tax profit by 29 percent and 24 percent, respectively. The management said Bauer Nike Hockey and Cole Haan also had double-digit sales increases, but it did not mention Nike Golf or Exeter Brands, perhaps implying that they scored less well.
The combined pre-tax profit of these businesses rose by a comparatively modest 16 percent to $77.5 million on 15 percent higher revenues of $600.9 million. The acquisition of Umbro, which was completed on March 3, should add more zest, while giving it clear leadership in football.
The football business conducted under the Nike brand grew at a double-digit rate during the latest quarter, and the company is making no secret of its determination to invest heavily in this important category. Besides the expensive contract it has just signed with the French Football Federation, which will also give it access to French amateur teams, it will raise its advertising and promotion expenses by one-third for the current quarter in connection with the Euro 2008 football championships and the Beijing Olympics. The European campaign will start in April, focusing on its new T-90 II boot.
In France, Nike replaced Adidas as sponsor of the national football team – not the French Football League, the organization of the top local teams, which have their own individual sponsors. Adidas in turn extended its sponsorship of the French Olympic Committee until 2012, but refused to say how much it will cost.
To properly showcase its newest line of football products, which will include the world’s lightest boot, it will set up a special “Boot Room” for football in its NikeTown store in London during the championships next summer – even though the England team didn’t qualify for the tournament. It hopes to replicate the success of its recently revamped running space in New York’s NikeTown, which helped raise store traffic by 14 percent and sales of running products by 35 percent.
Gross margins in the quarter improved to 45.1 percent from 44.2 percent in the same period a year ago. The bottom line benefited from an increase of only 3 percent to around $500 million in the company’s advertising and promotion spending during the quarter. A capital gain on the sale of Bauer Nike Hockey will provide some comfort in the 4th quarter, and the management’s expectations for the full year remain unchanged.
