Nike remains bullish after a strong second quarter

Strong performance in Western Europe, China, the direct-to-consumer (DTC) business and the growing women's segment of the sports market contributed to push the Nike group's revenues up by 14.8 percent to $7,380 million in the second quarter ended Nov. 30. The Swoosh is expecting further strong increases in sales and market shares in women's and China - the two topics that we are covering with our newest market research reports.

In terms of local currencies, sales grew by 18 percent across the group, with increases of 17 percent for the Nike brand and 24 percent for Converse. The gross margin improved by 1.1 percentage points to 45.1 percent. Operating earnings before amortization surged by 22.9 percent to $1,238 million. Net income went up by 22.7 percent to $655 million, beating analysts' estimates.

The management is keeping its projections for the full financial year unchanged in terms of constant currencies, predicting a low double-digit increase in turnover and 1.0 to 1.25 percentage points higher gross margins than last year through a higher proportion of revenues coming from premium products and DTC.

Predicting that they will increase in the next five years, the UBS Investment Bank notes that Nike's gross margins will be aided by declines of 45 percent in the price of oil and 35 percent in the cost of cotton since the beginning of its fiscal year.

However, the strengthening value of the U.S. dollar is likely to keep its results close to the bottom of the management's forecast for the year. It has already started to impact Nike's futures orders in terms of dollars.

The order backlog is up by 11 percent in terms of local currencies and only 7 percent in reported dollars. Excluding the global football category, which got a boost a year ago from the World Cup, orders were up at a rate similar to the 14 percent quarterly increase recorded three months ago. Including global football, they showed increases of 13 percent in North America, 13 percent in Western Europe, 18 percent in Central and Eastern Europe, 13 percent in Greater China, 3 percent in Japan and 1 percent in other Emerging Markets.

The Nike brand's sales increased in all regions and product categories except golf. The DTC business expanded by 30 percent worldwide, driven by a 66 percent jump in e-commerce. Basketball and women's stood out among the strongest categories in terms of growth, and they were partly responsible for Nike's 15.7 percent sales increase in North America.

Reporting on the”tremendous energy” encountered in the women's segment following the company's recent investments and initiatives in product and communication, the management said it is confident of reaching revenues of $7 billion in due time with its women's business, which is only about a third of the size of the men's business currently. It plans to do that through its digital platforms, by offering premium products for women and by enhancing their shopping experience. Reportedly, Nike's women's business is currently estimated at around $5 billion, with a 14 percent market share in the U.S.

Greater China, which has become the second-largest sporting goods market in the world according to NPD, is regarded by analysts as another major long-term development opportunity for the Nike brand. Its revenues in the region increased by 20.5 percent in dollars and by 21 percent in constant currencies during the latest quarter, reaching $758 million, way below the $3.24 billion generated in the more mature North American market.

The management credited its return to growth in China to healthier inventory levels and the implementation of Nike's policy of differentiating its points of distribution to create “more focused consumer experiences.” In spite of higher investments in DTC and the company's new campus in Shanghai, Ebitda grew by 31.0 percent to a significantly high level of $258 million for the brand in Greater China, driven by higher prices and gross margins.

Sales in Western Europe jumped by 22.1 percent in dollars and by 24 percent in local currencies for the brand, with a positive momentum in all categories and territories, led by footwear, football and running.  Partnerships with major retailers and 40 percent growth in DTC helped achieve the score in the region, which showed the highest growth in profits. Ebitda rose by 112.2 percent to $261 million, but remained relatively low as a percentage of revenues, which hit a level of $1.31 billion.

Comparatively, the Nike brand's Ebitda rose by 25.6 percent to $1.07 billion in North America. Evidently, Nike continued to invest heavily on marketing in Western Europe to gain further market share from its rivals. The increased profitability was attributed to more favorable exchange rates used in regional reporting and to a legal change that had depressed profits in the second quarter of last year.

 Surprisingly, sales grew at even higher rates of 17.3 percent in dollars and 25 percent in local currencies in Central & Eastern Europe, where Ebitda went up by 18.8 percent to $57 million on revenues of $346 million. As before, sales grew in all categories except action sports and in all territories except Israel.

In other Emerging Markets, Ebitda fell by 2.9 percent to $236 million as sales rose by 4.4 percent to $1.08 billion. On a currency-neutral basis, sales went up by 13 percent with increases in all countries except Mexico and Korea. The growth in Brazil slowed down due to the local macroeconomic conditions.

In Japan, Nike's sales declined by 5.3 percent to $758 million, and the regional Ebitda fell by 38.3 percent to $29 million, but revenues showed a 3 percent increase in yen.

Nike's sales of footwear grew faster than its sales of apparel in every region, but the management wants to see its apparel business becoming more important in the future.

The takeover of licensing agreements in Europe and Asia helped Converse to record a 20.6 percent sales increase on a reported basis to $434 million in the quarter. The introduction of higher-margin products led the brand to boost its gross margin by 1.2 percentage points to 45.1 percent, but its Ebitda was off by 12.0 percent to $88 million because of investments in infrastructure, demand creation and DTC.