Even Nike felt the pinch of the contracting global economy as it launched wide-ranging restructuring measures in reporting that its sales declined by 2 percent to $4.4 billion for its third financial quarter ended on Feb. 28. However, in constant currencies, the company’s sales still rose by 2 percent, prompting Nike’s managers to point out that they had again gained global market share. Orders for the Nike brand were down by 10 percent at the end of the quarter compared with the same time last year, but this was a decline of just 2 percent in constant currencies.
Nike faced the toughest market circumstances in Europe, the Middle East and Africa (EMEA), where the group’s sales fell by 14 percent to $1.2 billion for the quarter, a decrease of 4 percent in constant currencies.
Yet the company said that the Nike brand was outperforming the market and that it had increased its share in the five largest European markets in the quarter, both in footwear and apparel. Spain, Italy and France were singled out as rough markets for Nike, while the company said it was holding its own in spite of grim conditions in the U.K., and it was even doing nicely in Germany.
In reported terms, Nike’s apparel sales slid by 17 percent to $415.0 million in EMEA, while footwear sales declined by 12 percent to $693.8 million and equipment sales took a nosedive, by 24 percent to $77.1 million. In constant currencies, footwear sales were down slightly in EMEA, and apparel sales fell by 7 percent.
Pre-tax income for the region slumped by 18 percent to $276.9 million. Furthermore, future orders for EMEA at the end of the quarter were down by 25 percent, even though they declined by a lesser 9 percent in constant currencies.
Remarkably, Nike managed to lift its U.S. sales by 3 percent to $1.6 billion for the quarter. This was entirely driven by an 8 percent increase in footwear sales, while apparel sales were down by 9 percent and equipment sales dwindled by 2 percent. Managers said that their sales had increased at nine of out 10 of their leading accounts, and their business with the 10th account was flat.
The company lifted its own retail sales by 2 percent in the country, but this was entirely due to store openings and higher electronic sales. Comparable sales at its regular stores were down by 28 percent due to lower traffic, while comparable sales in its factory outlets dropped by 3 percent.
Nike’s managers boasted that the brand had raised its U.S. market share by 2.4 points during the 12 months through January, becoming more than three times bigger than the next brand in the market. The Nike group’s pre-tax income for the U.S. market even increased by 2 percent to $357.0 million and orders for the country were down by just 1 percent.
The slowdown in growth was striking in the Asia-Pacific region, where Nike had been accustomed to double-digit expansion. Despite a sales drop of 2 percent in Japan, Asia-Pacific sales for the last quarter were up by 8 percent to $806.9 million, or by 7 percent in current currencies.
Growth was dampened by slower expansion in China, where sales increased by about 10 percent for the quarter compared with a jump of 50 percent for the same quarter last year. The pace of the store openings is slowing down. Nike is working with retailers to clean up overhang from the second half of last year, and to build up more lasting mechanisms to regulate inventories, for example by opening factory outlets in China.
Nike’s pre-tax income for the Asia-Pacific increased a little faster than sales, up by 11 percent to $213.7 million. Not so mouth-watering any more, Nike’s orders for the region slipped by 1 percent at the end of the quarter, even though they would have crept up by 2 percent in constant currencies.
As for the Americas, they reported a sales decline of 5 percent to $245.4 million, but this was equivalent to a rise of 15 percent in constant currencies. Pre-tax income for the region was down by 22 percent to $41.1 million, as marketing costs increased and gross margins were down.
All in all, the Nike brand’s sales were up by 2 percent in constant currencies to $5.8 billion. Footwear sales increased by 6 percent to $2.6 billion, driven by growth in the U.S., China, Japan and the U.K. The Nike brand’s managers were particularly pleased about its double-digit growth in sales and orders in basketball. Furthermore, Nike’s strategy to get deeper into specific sports categories appeared to have worked out well in the action sports sector. Yet Nike is striving to tightly manage its inventories by cutting down on the number of SKUs in each category.
Nike’s global apparel sales fell by 4 percent. It did better with running apparel and Jordan products, and it started expanding its base layer sales and enjoying success with some lifestyle apparel pieces such as the Eugene track jacket. But Nike still had a hard time with apparel as it continued to clean up its inventories.
Again in constant currencies, the group’s brands other than Nike saw their turnover rise by 3 percent. Converse’s sales rose by 33 percent and Hurley continued to gain market share, but Cole Haan and Nike Golf were affected by tougher market conditions. The group’s managers further acknowledged that they still had a lot of work to do on Umbro, which is launching its new England kit later this month. In reported terms, sales of the brands other than Nike crept up by just 1 percent to $592.2 million.
As for their pre-tax income, it amounted to a loss of $344.1 million, compared with income of $106.1 million for the same quarter last year. Then again, this was entirely due to a pre-tax non-cash impairment charge of $401.3 million to adjust the value of Umbro. The British company’s forecast profits and cash flows both fell below the levels predicted at the time of the takeover bid in 2007. After tax, the non-cash charge amounted to $240.7 million.
The Nike group’s gross margin dropped by 1.2 percentage points to 43.9 percent, as production costs and discounts both rose during the quarter. On the other hand, the rate of SG&A expenses had declined by 4 percent, after the company started pushing through wide-ranging cost reductions. In constant currencies, marketing and operating expenses were both reduced by 1 percent.
Nike’s net income for the quarter was down to $243.8 million, compared with $463.8 million for the same three months last year. But excluding the impairment charge for Umbro, net income would have jumped by 4 percent.
The group’s management stated that its sales for the last quarter of Nike’s financial year would be roughly flat, but its gross margin would be well below last year’s performance, due to exchange rate changes and discounts. SG&A expenses should be down at a mid-teens rate for the fourth quarter, owing to cost-cutting and lower marketing expenses than at the same time last year, when Nike was gearing up for the Beijing Olympics and the European football championships.
However, Nike indicated that it would incur restructuring charges in the fourth quarter as it continued to rejigger its management and sourcing. The company said last month that the cuts could lead to a staff reduction of up to 4 percent. It added that it would seek to reduce the number of its manufacturers, to remove redundant management positions and to trim costs at all levels.
Restructuring costs would amount to between $175 million and $225 million, most of which would be charged in the fourth quarter. But the Nike group also indicated that the annual pre-tax savings from these cuts would amount to roughly the same figure.
Nike’s management indicated that sales are likely to decrease in the first half of its next financial year, compared with the first half of the running financial year. Although it is hard to predict how things would pan out exactly for the rest of the year, the company still expects sales growth to resume in the second half of the next financial year.
For the first nine months of the current financial year, the Nike group’s sales jumped by 7 percent to $14.5 billion. Its gross margin firmed up by 0.7 percentage points to 45.4 percent for the nine months. The Nike group ended the financial year to date with net income of $1.1 billion, down by 18 percent, but again this decline could be chiefly attributed to the impairment charge relating to Umbro.
