Nike will post price increases to keep margins

Nike's third-quarter gross margin fell by 1.1 percentage points to 45.8 percent largely due to higher product and airfreight costs. The trend will accelerate in the fourth quarter and persist throughout the next fiscal year ending in May 2012. The company expects a drop of at least 3.0 percentage points in the gross margin in the fourth quarter, from the 47.4 percent booked last year. Part of the decline is also due to costs related to the start of its Chinese distribution center, inaugurated on Feb. 22.

The company plans to introduce significant prices increase for the 2012 spring/summer collection that will help lift revenues in the second half of the 2012 fiscal year and mitigate the impact of rising costs.

For the 2011 fiscal year ending next May, the U.S. group expects gross margin to be 0.5 points lower than the previous year. It anticipates mid-single-digit growth for demand creation, after a mid-to-high-single-digit drop in the last quarter, and a mid-single-digit rise in operating overheads, following a low-single-digit increase in the fourth quarter.

In the 2012 fiscal year, the group sees revenues rising in line or above its high-single-digit target range thanks to strong consumer demand and higher selling prices. Higher production and airfreight costs and adverse currency fluctuations will continue to put pressure on the gross margin, which will however improve in the second half of the year thanks to the increase in selling prices.

Financial analysts forecast Nike ending the current fiscal year with sales of around $20.7 billion and a gross margin of around 45.8 percent, and the 2012 fiscal year with a turnover of $22.5 billion and a gross margin of 45.7 percent. In the 2010 fiscal year, the group booked sales of $19.0 billion and a gross margin of 46.3 percent.

In the third quarter finished Feb. 28, sales rose by 8 percent at constant currency rates to $5.079 billion, led by apparel up by 13 percent. Footwear turnover rose by 8 percent, sports equipment sales were down by 3 percent, and license revenues surged by 23 percent.

Currency-neutral sales grew in all markets except Japan. North America increased by 9 percent led by double-digit growth in the running, training and football categories. The only category to suffer a decline compared with the previous year was sportswear. Apparel sales were up by 18 percent and footwear by 7 percent, while equipment sales dipped by 4 percent. The company believes that its apparel business will continue to outpace footwear in the future. Footwear was supported by strong demand for the Lunar and Nike Free Running models. Nike estimated that it continued to gain market share in the North American footwear market but.

In Greater China, which Nike considers its most strategic market with North America, sales were up by 18 percent, with footwear rising by16 percent, apparel growing by 28 percent and equipment declining by 23 percent. Quarterly sales were lifted by double-digit growth in sportswear, running, men's training and action sports. The company said it remains on track to double its business in the country by the fiscal year 2015.

Western Europe sales were up by 6 percent, with footwear rising by 6 percent, apparel up by 7 percent and equipment up by 4 percent. In Central and Eastern Europe, revenues increased by 11 percent, driven by double-digit growth in Russia, Turkey and Poland. All categories grew, with footwear up by 9 percent, apparel by 13 percent and equipment by 18 percent.

Japanese turnover dropped by 16 percent, registering double-digit drops in all categories. Footwear was down by 12 percent, apparel by 16 percent and equipment by 38 percent. Revenues in emerging markets were higher in all categories and markets, except South Africa. Sales rose by 15 percent led by Mexico, Argentina and South Korea. Footwear was up by 15 percent, apparel by 13 percent and equipment by 15 percent.

Overall sales for the Nike brand were up by 9 percent on a neutral currency basis, while the combined turnover for the other brands – Cole Haan, Converse, Hurley, Nike Golf and Umbro – increased by 1 percent.

The order backlog for athletic footwear and apparel for the Nike brand due to be delivered from March to July stood at $7.9 billion at the end of February, up by 9 percent excluding currency variations. The average selling price for shoes was increased slightly, while it fell slightly for apparel. Orders grew in all markets, except Western Europe where they were flat. Orders were up by 11 percent in North America, 9 percent in Central and Eastern Europe, 13 percent in China, 2 percent in Japan, and 18 percent in emerging markets. Nike expects that revenues and profits in Japan will be negatively affected by the chaos caused by the 8.9-magnitude earthquake and tsunami that hit the country on March 11.

Nike's inventories totaled $2.5 billion at the end of February, up by 18 percent from a year earlier to meet growing demand, especially from North America and China. In the third quarter, the group experienced some capacity shortage for some technical products. The company's suppliers have addressed the issue by adding footwear and apparel production lines over the past months and are committed to significantly expanding capacity through the next fiscal year.

Nike finished the third quarter with a net income of $523 million, up by 5 percent. During the quarter it bought 5.5 million shares for $468 million. In the first nine months of the year, Nike's sales were up by 9 percent at constant currency rates to $15.096 billion and net income increased by 11 percent to $1.539 billion.