The daylong investor meeting in Beaverton came the day after Nike released its results for the last quarter of its fiscal year, until the end of May. While the Nike group moved full steam ahead in most markets, its sales were still sluggish in Europe. Orders indicate that underlying demand remains nearly stagnant in Western Europe, but it appears to be rebounding in central and Eastern Europe.

Nike's sales in Western Europe for the quarter increased by 5 percent to just over $1 billion, but they inched up by only 1 percent in constant currencies. This little rise was entirely due to footwear, while Nike's underlying sales of apparel and equipment both declined in Western Europe. Nike's turnover in this region was depressed by lower sales in action sports and sportswear, while football sales were flat.

Nike's Ebit in this region dropped by 27 percent to $140 million, due to unfavorable exchange rates as well as higher product costs, which have been affecting Nike's quarterly gross margin overall. Futures orders for Western Europe inflated by 11 percent, but this amounts to an increase of just 1 percent in constant currencies.

In central and Eastern Europe, Russia continued to deliver sharply rising sales for Nike, but this could not make up for declines in most other markets. Nike's turnover in the region crept up by 1 percent to $294 million, but it dropped by 1 percent in constant currencies for the quarter. Markets in this part of Europe were particularly affected by a sharp fall in sales of sportswear and football products, which could not be made up for with double-digit growth in sales of running, basketball and action sports ranges.

Nike's Ebit in the region decreased by 15 percent to $69 million, as it not only suffered from lower sales and margins, but also from higher selling expenses. The sales outlook was more encouraging for central and Eastern Europe, where futures orders climbed by 10 percent in constant currencies.

The Nike group performed much more impressively overall, with a sales increase of 14 percent to nearly $5.8 billion for the quarter, up by 11 percent in constant currencies. The turnover of the Nike brand alone jumped by 15 percent to almost exactly $5 billion. The increase amounted to 12 percent in constant currencies, driven by robust expansion in North America, China and the Emerging Markets group. It enjoyed growth in all categories except football, due to the fact that sales in the same quarter last year were buoyed ahead of the football World Cup. What's more, the Nike brand's futures orders improved by 15 percent at the end of the quarter, a rise of 12 percent in constant currencies.

Nike Group - Breakdown of Sales & EBIT margins

(Million $, Year ended May 31)

 

2011

2010

% Change

North America

     

Footwear

5,109

4,610

10.8

Apparel

2,105

1,740

21.0

Equipment

364

346

5.2

Total Sales

7,578

6,696

13.2

EBIT Margin

23.1%

23.0%

0.5

Western Europe

     

Footwear

2,327

2,320

0.3

Apparel

1,266

1,325

-4.5

Equipment

217

247

-12.0

Total

3,810

3,892

-2.1

EBIT Margin

18.9%

22.0%

-14.0

Central & Eastern Europe

     

Footwear

600

558

7.5

Apparel

356

354

0.6

Equipment

75

81

-7.4

Total

1,031

993

3.8

EBIT Margin

22.6%

25.5%

-11.3

Greater China

     

Footwear

1,164

953

22.1

Apparel

789

684

15.4

Equipment

107

105

2.4

Total

2,060

1,742

18.3

EBIT Margin

37.7%

36.6%

3.1

Japan

     

Footwear

396

433

-8.6

Apparel

302

357

-15.3

Equipment

68

92

-26.4

Total

766

882

-13.2

EBIT Margin

14.9%

20.4%

-27.1

Emerging Markets

     

Footwear

1,897

1,458

30.1

Apparel

657

577

13.9

Equipment

182

164

11.0

Total

2,736

2,199

24.4

EBIT Margin

25.1%

23.7%

6.1

Total Nike Brand Sales

18,104

16,509

9.7

EBIT Margin

18.1%

18.9%

-3.9

Other Brands Sales

2,747

2,530

8.6

EBIT Margin

12.2%

11.8%

2.9

REVENUES

20,862

19,014

9.7

Total EBIT

2,848

2,523

12.9

Total EBIT Margin

13.7%

13.3%

2.9

The most impressive performance came from North America, where the Nike brand's sales soared by 22 percent to $2.1 billion for the quarter, up by 21 percent in constant currencies. Again, the brand did better in all categories except football. The brand's own retail sales in North America inflated by 23 percent, including an increase of 18 percent in same-store sales, and a rise of 31 percent in online sales.

Nike Future Orders

for Delivery from June to November 2011 (%)

Region

Reported
Future
Orders

Excluding
Currency
Changes

North America

+14

+14

Western Europe

+11

+1

Central and Eastern Europe

+13

+10

Greater China

+24

+17

Japan

-13

-6

Emerging Markets

+25

+23

Total

+15

+12

Nike's Ebit progressed by 20 percent to $522 million in North America, in spite of a lower gross margin. Furthermore, futures orders for the region jumped by 14 percent, both in dollars and in constant currencies.

Nike had another outstanding quarter in China, where its sales inflated by 21 percent to $564 million, up 16 percent in yuan. The increase was driven by expanded distribution, and comparable store increases for its thousands of franchised stores. Ebit in China was up 21 percent to $226 million. As for futures orders, they confirmed the buoyant trend with an increase of 17 percent in yuan.

Emerging markets continued to shine, with a sales hike of 25 percent to $747 million, up by 19 percent in constant currencies. Argentina, Brazil, South Korea and Mexico all saw their sales increase at double-digit rate for the quarter. Nike's Ebit in emerging markets grew even faster, up by 68 percent to $197 million, as exchange rates inflated its gross margin. The growing sales trend shows no sign of abating, at least judging from futures orders, which are up by 23 percent in constant currencies.

Japan was the only region where Nike's sales declined significantly, down by 26 percent in constant currencies. With a little help from exchange rates, the drop was reduced to 17 percent in reported terms, to $216 million. Nike was hurt by the tight economic situation in Japan, which was worsened by the earthquake and tsunami in March. Its Ebit for Japan shriveled to $20 million, down by 67 percent. Futures orders are not very encouraging, either, down by percent in yen.

Sales of the Nike group's other brands increased by 6 percent in reported terms to $760 million and by 5 percent in constant currencies. The turnover of Umbro and Nike Golf was on the slide, but this was more than offset by growing sales for Converse, Cole Haan and Hurley. The sales drop at Nike Golf was worsened by the disasters that hit Japan in March, while Umbro struggled with a tough comparison with last year, when it was gearing up for the football World Cup.

The entire group's gross margin dipped by 3.1 percentage basis points to 44.3 percent, chiefly due to higher product costs. Other issues included elevated freight costs, as Nike had to resort to more air freight to satisfy demand. The company also had to pay more royalties related to sales of endorsed team products, and more inventory reserves.

Marketing expenses declined by 7 percent to $617 million, since Nike no longer had to invest in the football World Cup. On the other hand, operating overhead expenses increased by 8 percent, leading to a rise of 2 percent in selling and administrative expenses – still much lower than the increase of sales for the quarter. The company ended the quarter with Ebit of $777 million, up by 13 percent, and net income of $594 million, up by 14 percent.

Nike Consolidated Income Statement

(Million $, Year ended May 31)

 

2011

2010

%
Change

REVENUES

20,862

19,014

9.7

Cost of Sales

11,354

10,214

11.2

Gross Profit

9,508

8,800

8.0

Gross Margin

45.6%

46.3%

-1.5

SG&A

6,693

6,326

5.8

Net Interest Expense

4

6

-33.0

Other Income, net

-33

-49

-32.7

Pre-Tax Income

2,844

2,517

13.0

Tax

711

610

16.5

NET INCOME

2,133

1,907

11.9

$/Share (diluted)

4.4

3.9

13.7

For the full fiscal year, the Nike group's sales jumped by 10 percent to $20.9 billion, with negligible impact from currency changes. The Nike brand led the way, with a sales increase of 10 percent to $18.1 billion, again with little impact from exchange rates. Other brands saw their sales rise by 9 percent to $2.7 billion: In constant currencies, their sales were up by 8 percent, with increases for all brands except Nike Golf, which suffered a slight dip.

The group's gross margin dropped by 0.7 percentage points to 45.6 percent, even though Nike increased the share of its sales through its own retail outlets, and with a higher price mix. The adverse impact on the gross margin came from many of the same factors as in the last quarter. For the full year, license revenues were also affected by the conversion of a few markets to direct distribution of the Converse and Umbro brands.

The company ended the year with net income of $2.1 billion, up by 12 percent. Its inventories increased by 33 percent to $2.7 billion, but this compares with unusually low levels of inventory at the end of the previous fiscal year.