Nike leaps ahead in Europe, recovers in China

Nike delivered an exceptionally strong third quarter in terms of sales and orders, particularly in Europe. Group revenues went up by 12.7 percent to $6,972 million for the period, ended Feb. 23, but net earnings from continuing operations grew by only 3.5 percent to $685 million, and they actually fell by 20.9 percent taking into account the extraordinary gains obtained in the year-ago period from the sale of Umbro and Cole-Haan.

The results were slightly better than analysts had expected, but they nevertheless punished the company with a 5.1 percent decline in the share price at the day's close after hearing from the management that the fourth quarter will not be as good and that Nike will probably miss its target of an annual increase in profits of around 15 percent in the next financial year. Group managers cited in particular the impact of the devaluation of some currencies such as the Russian ruble, which will be a drag on gross margins, and investments in product innovation, the Fifa World Cup and retailing initiatives.

For the Nike brand, whose results now include those of Nike Golf and Hurley, total sales rose by 12.4 percent to $6,554 million. They were up by 14 percent in local currencies, with increases of 14.5 percent for footwear, 9.7 percent for apparel and 6.6 percent for equipment. Shoes grew faster than clothing in every region.

The Direct-to-consumer (DTC) sales channel contributed to the overall growth with an increase of 23 percent, driven by gains of 10 percent on a comparable store basis and 57 percent online.

Converse was up by 16.3 percent to $420 million for the quarter, in dollars as well as in local currencies, and the brand's operating margin expanded by 10 percent. The sales results were particularly strong in the U.S., China and the U.K. Converse is taking on the distribution in Scandinavia and Taiwan, and additional conversions from licensees are planned for the next financial year.

One big surprise was an acceleration to 19 percent in the Nike brand's growth in Western Europe in constant currencies, which translated into a 22 percent increase to $1,282 million in dollars. Orders from the region were up by 30 percent. The momentum seemed to support the projection made recently by a local agency, Citi Research, that the Swoosh will overtake the Three Stripes in Europe this year. Its forecast was based on a survey of 185 European retailers, where 56 percent of them indicated that Nike was gaining market share and 34 percent said that Adidas was losing ground.

The U.K., Germany, Austria and Switzerland showed double-digit gains for the second quarter in a row. All other major markets in the region showed positive figures except Italy. Double-digit increases were scored in the brand's largest performance categories – Running, Football, Basketball and Women's Training – as well as in Sportswear, but not in Action Sports.

DTC sales grew by 29 percent in Western Europe, with a 14 percent increase on a same-store basis and strong growth in e-commerce. Operating profit (Ebit) jumped by 54 percent to $275 million in the region.

Trevor Edwards, president of the Nike brand, attributed the improvements in Western Europe to the reorganization of its business there two years ago, “and we are just getting started,” he added. It is now working more closely with wholesale partners such as Foot Locker and JD Sports to better segment and differentiate the market.

The countries in Central and Eastern Europe (CEE) performed well, too, boosting Nike's sales by 22 percent in local currencies and by 17.5 percent in dollars to $356 million, and generating a 23 percent higher operating profit of $79 million in spite of higher spending on the Winter Olympics in Sochi. Double-digit increases were reported in Russia, Turkey, Poland and Greece, but there was a sales decline in Israel, which belongs to this region in Nike's accounts. Company officials said that they had not seen any decline in their business in Russia, which represents less than 25 percent of the turnover in the CEE countries.

Another piece of good news was a return to growth in Greater China. Sales grew by 7 percent in local currencies and by 9 percent in U.S. dollars, reaching $697 million. Sportswear, Basketball and Running were the categories that led the growth.

Company officials explained that Nike has been creating some of its best stores in the world there lately, testing new merchandising concepts and making them more productive with more focused product assortments. It has also made changes to its local supply chain to improve inventory levels at the wholesale level.

One of the results has been a 27 percent sales increase in the DTC chain in Greater China for the quarter, with growth of 11 percent on a comparable store basis and significantly higher gross margins. Operating profits rose by only 7 percent in the region because of higher marketing expenses and investments in a new local head office and retailing. On the other hand, flat or slightly lower sales are expected in the fourth quarter due to planned changes in the seasonal product flow.

Other Emerging Markets showed a 19-percent currency-neutral sales increase that took their turnover up by 8 percent in dollars to $937 million. Seven out of nine territories showed double-digit growth. The strongest geographies were Brazil, Mexico, Argentina, Uruguay and Chile. In terms of product categories, Running, Football and Sportswear showed the strongest gains. Futures orders from the region were up by 24 percent at the end of the quarter.

Continued positive momentum was reported in Japan, up by 10 percent on a currency-neutral basis with increases in nearly every key category. The depreciation of the yen affected sales and profits in terms of dollars, combined with expenses related to the launch of nike.com in the country.

In North America, Nike's sales rose by 12 percent to $3,069 million, and futures orders were up by 9 percent. The management noted that strong demand for certain products pulled some future orders into the third quarter. Operating income from the region increased by 11 percent in spite of higher marketing expenses to support new product launches.

Nike said it scored double-digit growth rates in its largest categories: Sportswear, Running and Basketball. In running, the women's business continued to grow faster than men's. One key element of this was the Nike Training Club concept, which will be applied to nearly 50 stores around the world by the end of May.

The gross margin improved to 44.5 percent in the latest quarter from 44.2 percent in the corresponding period a year ago, thanks to higher average selling prices and the strengthening retail business, offset by negative currency effects and product cost inflation.

Spending on demand creation was raised by 18.4 percent to $733 million in the quarter, representing 10.5 percent of the turnover, but some World Cup investments have been shifted to the fourth quarter. Demand creation expenses are budgeted to increase by over 30 percent in the fourth quarter

The management predicted that sales will increase by a high single digit in the fourth quarter and settle at the top end of its high single digit target for the full financial year. On a currency-neutral basis, revenues should increase in the next financial year at a high single digit or slightly above that target.

The gross margin will probably go up by 50 to 75 basis points in the fourth quarter ending May 31, and it should be up by around 90 basis points higher for the full year, but the management refrained from making a forecast for next year.

Mark Parker, president and chief executive of Nike, credited product innovation and the brand's strong link with consumers for the recent gains. He said it was clear to him that Nike “has more capacity to innovate in more dramatic ways than ever before,” but pointed out that it focuses on the opportunities that present the highest potential for growth. Nike will also pursue innovation in manufacturing, sharing the investments with its suppliers.