The Nike group managed to raise its sales in constant currencies in all regions for the quarter until the end of August, including a return to growth for the Nike brand in North America. Yet some investors remained concerned about the relative low level of orders in North America, which were up by just 1 percent at the end of the quarter, along with a sizeable drop in the group's operating profit.

The revenues of the whole Nike group were up by 8 percent to $9,061 million for the quarter, which is the first in its fiscal year. The Nike brand's sales alone advanced by 7 percent to $8,459 million for the three months, and they were up by 10 percent in constant currencies. The turnover moved up at a double-digit rate on a currency-neutral basis in all regions other than North America, driven by sportswear, running and the Jordan brand.

Nike Consolidated Income Statement
(Million $, Quarter ended August 31)

 

2016

2015

%
Change

REVENUES

9,061

8,414

7.7

Cost of Sales

4,938

4,419

11.7

Gross Profit

4,123

3,995

3.2

Gross Margin

45.5%

47.5%

-2 pp

Demand Creation

1041

832

25.1

Operating Overhead

1,856

1,745

6.4

Interest Expense

7

4

75.0

Other Expense (income)

(62)

(31)

100.0

Pre-Tax Income

1,281

1,445

-11.3

Tax

32

266

-88.0

NET INCOME

1,249

1,179

5.9

$/Share (Diluted)

0.73

0.67

9.0

While it had enjoyed remarkable growth in North America in the previous years, Nike had already reported flat sales for the region for the last quarter of its previous fiscal year, ended on May 31, as it came under attack from brands such as Under Armour, Adidas and Skechers. Nike's sales in North America returned to growth in the latest quarter, rising by 6 percent to $4,031 million, propped up by sportswear and the Jordan brand. Nike has been working to rebalance supply and demand in the region. It thus predicts that sales growth for the remainder of the fiscal year will outpace the increase in orders, due to a better sell-through of its products to consumers.

The Nike brand's underlying business remained strong in Western Europe, where sales jumped by 7 percent to $1,763 million. That amounted to a rise of 10 percent in constant currencies, driven by sportswear, global football, running and the Jordan brand. Nike worked with key retailers such as Intersport and Foot Locker to create compelling displays in Western Europe, and its own retail sales in the region were up by 30 percent. Maybe as a barb for Adidas, which has picked “cities” as a focus for its five-year strategy, Nike said it was rated by consumers as the favorite brand in all key cities in Western Europe.

The Nike brand continued to rise sharply in Greater China, with a sales increase of 15 percent to $1,020 million, up by 21 percent in yuan renminbi. Nike and its wholesale partners are continuing to switch to an upgraded and more productive store format, while focusing on mobile shopping for the development of an already thriving online sales business.

Investments around the Rio Olympics contributed to a sales increase of 11 percent in constant currencies in Emerging Markets, which include Brazil.

Meanwhile, the Converse brand managed a global sales increase of 3 percent to $574 million in the quarter, up by 4 percent in constant currencies.

Orders for the Nike brand were up by 5 percent overall at the end of the quarter. That was a rise of 7 percent in constant currencies, with 2 percent growth in units and a 5 percent increase in average selling prices. All regions outperformed North America in the futures growth, with rises of 9 percent in Western Europe and 19 percent in Greater China, among others.

However, the group's profitability was impacted by a sharp decline in its gross margin as well as extra investments. Its operating profit was down by 11 percent to $1,281 million for the quarter. It fell by 4 percent in North America and 19 percent in Western Europe, due to extra spending on the European football championships and the Olympics.

Nike Regional Sales & EBIT
(Million $, Quarter ended August 31)

 

2016

2015

%
Change

North America

Footwear

2,518

2,366

6.4

Apparel

1,317

1,247

5.6

Equipment

196

186

5.4

Total Sales

4,031

3,799

6.1

EBIT margin %

24.9

27.4

-2.5pp

Western Europe

Footwear

1,147

1,128

1.7

Apparel

531

434

22.4

Equipment

85

79

7.6

Total

1,763

1,641

7.4

EBIT margin %

22.2

29.5

-7.3pp

Central & Eastern Europe

Footwear

270

238

13.4

Apparel

138

133

3.8

Equipment

32

30

6.7

Total

440

401

9.7

EBIT margin %

18.4

24.4

-6.0pp

Greater China

Footwear

710

599

18.5

Apparel

269

246

9.3

Equipment

41

41

0.0

Total

1,020

886

15.1

EBIT margin %

36.3

37.2

-0.9pp

Japan

Footwear

166

122

36.1

Apparel

60

43

39.5

Equipment

19

14

35.7

Total

245

179

36.9

EBIT margin %

20.4

20.1

0.3pp

Emerging Markets

Footwear

661

670

-1.3

Apparel

234

238

-1.7

Equipment

50

58

-13.8

Total

945

966

-2.2

EBIT margin %

18.1

26.7

-8.6pp

Global Brand Divisions

15

26

-42.3

Total Nike brand sales

8,459

7,898

7.1

EBIT margin %

15.3

20.6

-5.3pp

Other Brand Sales

574

555

3.4

Corporate

28

(39)

-

REVENUES

9,061

8,414

7.7

Total EBIT

1,288

1,449

-11.1

Total EBIT margin %

14.2

17.2

-3pp

The group's gross profit margin shrank by 2.0 percentage points to 45.5 percent, as increased average selling prices could not make up for several (supposedly) temporary factors, such as unfavorable exchange rates, more discounts and the impact of pulling out of the golf equipment business. The gross margin was further affected by a shift of expenses from operating overheads to cost of goods sold.

Marketing costs jumped by 25 percent to $1.0 billion, due to the European Football Championships and the Rio Olympics. Mark Parker, Nike's chief executive, noted in a conference call with analysts that over 1,500 Olympians from 60 countries won 189 medals wearing Nike – if Nike were a country, it would have come top of the medal leader board, he said. The related campaign, Unlimited You, reached more than 480 million views online. It was highly rated by an advertising assessment firm, Ace Metrix.

NIKE Future Orders
As of August 31 2016 (%)

Geography

Reported
Future
Orders

Excluding
Currency
Changes

North America

+1

+1

Western Europe

+4

+9

Central and Eastern Europe

+9

+9

Greater China

+15

+19

Japan

+26

+11

Emerging Markets

+6

+10

Total

+5

+7

Operating overhead expenses were also up by 6 percent to $1.9 billion, with added investments in Nike's own retail business and operational infrastructure. The group still ended the quarter with a 6 percent rise in net income to $1,249 million, which appears to have been entirely due to a reduction in the effective tax rate from 18.4 percent to 2.5 percent.

Parker was eager to emphasize that the recent investments were meant to support the Nike brand's development in the long term. He said that advances in digital technology and retailing are ushering in a new era of personalized performance, through product, consumer connections and the supply chain - exactly as outlined in our preview of next month's WFSGI Manufacturers' Forum in this issue.

The Nike group has embarked on what it calls Man Rev, short for Manufacturing Revolution. This is meant to reduce product cost, with a rise in labor productivity, less waste and faster production. Another aspect of Man Rev is a shift toward digital design – a transition in precision from stitch level to pixel level, as Parker puts it. The group said the tangible results so far are driven by automation and being closer to market, and the gains from improvements in the supply chain are in the tens of millions of dollars per quarter.

The investments in retailing appear to be paying off as well, as the group's turnover from own retailing jumped by 22 percent in constant currencies for the quarter, with a comparable sales expansion of 8 percent. Nike's own online sales surged by 49 percent. The quarter was also marked by the integration of Nike.com and Nike+ before the launch of the group's partnership with Apple in September.

The group's guidance for sales in the full fiscal year remains unchanged, calling for a high single to low double-digit increase in constant currencies. However, Nike predicts that its gross margin will contract, with a decline of about 1.25 percentage points in the second quarter.

Earlier in September, at the group's annual shareholders' meeting, Parker had already reiterated Nike's target to reach sales of $50 billion by the fiscal year ending in May 2020. It was the first time that Parker appeared at the shareholders' meeting as chairman, following the retirement of Phil Knight.