Nike’s recovery was in full swing in the last quarter of its fiscal year, ended on May 31, showing strong improvements in sales and profits. The three months were buoyed by the football World Cup, which lifted the entire group’s football sales by about 39 percent.
Nike’s managers were thrilled with the broad exposure of their bright orange and purple boots, worn by nearly half of the players at the tournament in South Africa. Nike claimed this was almost 50 percent more than its nearest competitor.
After the results were published, Nike and its subsidiary Umbro had seen half of its 10 teams go through the first stages of the tournament, while six out of 12 Adidas teams and only two out of Puma’s seven teams had qualified for the second round. After the more recent matches, where England lost, Brazil, Portugal and the Netherlands were the only teams wearing Nike still in the running. Adidas and Puma still had the same number of teams and Brooks clinged to Chile.
Football fueled whopping sales rises for the Nike group in Brazil and other emerging markets, and triggered a jump of 57 percent in Umbro’s sales for the quarter. The Nike group’s orders of football products went up at strong double-digit rates, indicating that the impact will continue well beyond the event.
The Nike group finished its fiscal year with a sales dip of 1 percent to $19.0 billion, a slide of 2 percent in constant currencies. However, its performance improved significantly in the second half: The last quarter showed a sales increase of 8 percent to $5.1 billion, up by 4 percent in constant currencies.
The group’s management attributed the recovery to focused investments in seven distinct categories of Nike products. Action sports achieved a sales increase of more than 15 percent for the year, while football and basketball managed low-single-digit hikes and the four other categories still saw their sales decline.
The year was further marked by the rise of Nike’s own retail business, which increased its turnover by 12 percent to nearly $2.5 billion for the year, representing 15 percent of sales under the brand. Its online sales grew by 25 percent to $260 million, with Nike id topping $100 million in revenues.
Another highlight was a firming up in Nike branded apparel sales toward the end of the fiscal year, which was regarded as a reward for two years of investments in this segment. Nike’s apparel sales were down by 4 percent for the full year, a decrease of 5 percent in constant currencies, but they showed an increase of 13 percent in the last quarter, which amounted to a rise of 8 percent in constant currencies. The growth was led by performance apparel, as Nike cut back on its sportswear range.
In constant currencies, the Nike brand’s footwear sales increased by 2 percent for the quarter but slid by 1 percent for the year, while equipment sales fell by 6 percent for the quarter and by 7 percent for the year.
The Nike brand’s turnover as a whole jumped by 7 percent to nearly $4.4 billion for the quarter, with 4 points of growth added by currency changes. For the full year the Nike brand’s sales dipped very slightly to $16.5 billion, down by 1 percent in dollars and by 2 percent in constant currencies.
Most encouragingly, the Nike brand’s orders were up by 7 percent at the end of the quarter, and even by 10 percent excluding currency changes. Again in constant currencies, Western European orders jumped by 11 percent and they increased by 3 percent in Central and Eastern Europe. North America managed a hike of 7 percent in orders, surpassed by a rise of 16 percent in Greater China and even 30 percent for emerging markets. Japan was the only region where orders decreased, by 16 percent in constant currencies.
Nike’s underlying sales continued to decline slightly in Western Europe for the last quarter, down by 2 percent in constant currencies, but they inched up by 2 percent in reported terms to $956.0 million. In European currencies, footwear sales declined by 4 percent for the three months, while apparel increased by 3 percent, but equipment was down by 16 percent. The company’s earnings before interest and tax (Ebit) dipped in the region by 17 percent to $193 million.
Sales in Central and Eastern Europe continued to deteriorate in the last quarter, down by 3 percent in constant currencies, but they picked up by 9 percent in dollars to $331.9 million. Yet again, Ebit for the region was down by 9 percent to $84 million.
When it comes to North America, the management pointed to a strong 13 percent quarterly rise of Nike’s apparel sales, while footwear sales inched up by 1 percent and equipment sales were flat. Nike’s North American turnover reached $1.8 billion for the quarter, up by 4 percent.
The rise was stimulated by Nike’s own retail sales, up by 19 percent for the quarter, with a hike of 27 percent for electronic sales and an increase of 17 percent in comparable sales at Nike stores – much more buoyant than the 2 percent increase in its wholesale turnover. Nike lifted its Ebit for North America by 8 percent to $435 million.
Greater China is clearly back on track for Nike, with a sales jump of 12 percent to $464 million and Ebit up by 20 percent to $187 million for the quarter. The brand’s existing Chinese stores lifted their comparable sales, and Nike added more doors. The increase was fuelled by sportswear, football and action sports.
Emerging markets delivered yet more impressive figures, with sales up by 47 percent to $556 million for the quarter, a rise of 28 percent in constant currencies. Football fuelled the growth and the impact of the World Cup was strongest in Brazil, leading to a sales rise of 74 percent in the country for the quarter. Throughout Nike’s emerging markets, football revenues jumped by more than 60 percent. Its Ebit in these countries was up by 46 percent to $114 million.
Only Japanese sales continued to suffer badly, showing a decline of 8 percent to $261 million, down by 12 percent in constant currencies. Japan’s Ebit dropped by 6 percent to $61 million for the quarter.
For the full year, Nike’s underlying sales were still down in most regions, with the exception of China, where they remained flat, and the emerging markets, which lifted their sales of Nike products by 18 percent in constant currencies. Otherwise, North America was down by 1 percent, while Western Europe fell by 6 percent, Central and Eastern Europe declined by 17 percent, and Japan tumbled by 12 percent for the year.
The Nike group’s other brands, from Converse to Hurley, Umbro, Nike Golf and Cole Haan, ended the year on an upswing. Their sales increased by 9 percent to $714 million for the last quarter, an increase of 6 percent in constant currencies. For the full year, their turnover climbed by 5 percent to reach more than $2.5 billion, up by 4 percent in constant currencies.
Converse alone lifted its quarterly sales by 4 percent, ending the full year with an increase of 7 percent to $983 million. Hurley’s sales for the year stood at about $221 million, an increase of 9 percent. On the back of its whopping sales increase in the last quarter, Umbro reached a turnover of $224 million for the year, up by 29 percent.
After two weak quarters at the start of the fiscal year, Nike Golf and Cole Haan both recovered in the second half but still ended the year with a decline of 2 percent each. Nike Golf’s turnover slipped to $638 million, while Cole Haan’s sales declined to $464 million.
This “other brands” business unit reported Ebit of $299 million for the year, compared with a loss of $193 million the previous one. However, the prior fiscal year was impacted by a pre-tax non-cash impairment charge of $401 million to adjust the value of Umbro. Excluding this, the other business unit’s Ebit would have increased by 43 percent.
Just as significantly, the Nike group’s gross margin continued to rise, ending the quarter at 47.4 percent, up by 4 full percentage points from the same period a year ago. For the full year, the gross margin reached 46.3 percent, up from 44.9 percent. The company attributed this to better margins on in-line products, fewer close-out sales and the growth of its own retail business. This jump in Nike’s gross margin partly went to support an increase in marketing spend, which inflated by 43 percent for the quarter, but remained flat for the full year.
Nike ended the last quarter with net income of $522 million, up by 53 percent. However, the comparison is again distorted by an after-tax restructuring charge of $145 million in the same quarter the previous year. Excluding the charge, Nike’s net income for the fourth quarter would have increased by 7 percent. The group further prided itself with a decline of 13 percent in its inventories, and it generated a record $2.8 billion in free cash flow from operations.
For the current fiscal year, Nike’s managers pointed to the negative impact of exchange rates. In constant currencies, the company expects its turnover to rise at a high-single-digit rate for the full year, with a low-double-digit increase for the first quarter. However, chiefly due to the stronger dollar, reported sales should be down for both the quarter and the full year.
Furthermore, Nike warned that its gross margin may drop by half a point for the opening quarter and by a full point for the fiscal year, due to significant pressure on costs. The factors range from the stronger dollar to rising costs for product components such as oil, labor and freight. Nike has also had to resort to air freight to meet fast growth in orders of its running products.
The impact of the many investments made by Nike in the last years to streamline its sourcing will likely not be sufficient to cover the higher costs in the fiscal year just started, but Nike officials see some space for improvement in the group’s gross margin in the longer term.