Nike wows the market

Nike started its fiscal year with an exuberant quarter, defying economic issues in China and reporting impressive increases in futures orders. The results for the three months until the end of August were way above market estimates and ahead of Nike's own expectations.

The Nike group's sales climbed by 14 percent in constant currencies and reached $8,414 million, an increase of 5 percent in dollars for the quarter. As the company sold more valuable products and raised the percentage of sales through its own stores, its gross profit margin amplified by 0.9 percentage points to 47.5 percent. Marketing spend declined by 7 percent compared with the same quarter last year, which included the football World Cup in Brazil. Nike's net income jumped by 23 percent to $1,179 million.

Analysts gushed about the performance and Nike managers insisted that the company could continue to perform outstandingly. Nike's share price has surged by more than 30 percent so far this year, reaching up to $125 last week and putting Nike's market capitalization at more than $100 billion.

Mark Parker, the Nike group's chief executive, attributed the rise to Nike's relentless drive to engage consumers with innovation. Apart from various footwear launches he pointed to Therma-Sphere Max and Aeroreact, two new performance apparel technologies for temperature regulation.

Another important element of the group's strategy is its ability to leverage its assortment of brands, using Nike technology for another brand, or expanding brands into new categories. Parker indicated that Nike would do just that with the Jordan basketball brand, moving into the training category.

The Nike brand's sales alone amounted to $7,898 million for the quarter, advancing by 15 percent in constant currencies and by 6 percent in dollars. It was on the rise in all geographical entities and nearly all key categories. Nike's own retail sales expanded by 21 percent due to store openings, comparable store sales growth of 7 percent and online sales expansion of 46 percent.

Trevor Edwards, the man in charge of the Nike brand, emphasized its buoyant performance in the running category. Nike's women's business expanded at double-digit rate, with product launches and targeted retail initiatives, through Nike stores and wholesale partners.

The most impressive performance came from China, where the Nike brand's sales inflated by 30 percent in yuan and the same in dollars to reach $886 million for the quarter. The rise was driven by footwear, with sales up by 36 percent to $599 million, compared with an increase of 22 percent to $246 million for apparel. The company's earnings before interest and taxes (Ebit) soared by 51 percent in China to $330 million in the three months, which included the athletics World Championships in Beijing.

“Amazing” was the word used by Edwards to describe Nike's performance after strategic changes implemented in China in the last two years. The gains came from nearly all key categories, including sportswear, running and basketball. Updated Nike stores run by wholesale partners outperform others, supporting increased productivity. Edwards said Nike was very mindful of macro-economic volatility but the inventory situation has cleared up and the brand will continue to drive its “category offense” strategy in China.

Meanwhile, sales moved up by 14 percent in constant currencies in Western Europe, fueled by sportswear, basketball and running, while football sales were predictably off. Much of the expansion came from footwear, which generated a sales increase of 19 percent, compared with 3 percent for apparel. The brand's turnover in Western Europe reached $1,641 million, down by 4 percent in dollars. The restructuring measures taken in Europe apparently continued to pay off, with an increase of 20 percent in regional Ebit to $485 million – amounting to an Ebit margin of 29.5 percent.

The group attributed Nike's European drive to the implementation of the category offense strategy, which transpires in upgraded retail partnerships with the likes of Intersport, JD Sports on Oxford Street in London and the expansion of House of Hoops with Foot Locker in Berlin. Its own retail sales increased by 31 percent in Western Europe for the quarter.

North American sales remained robust, up by 8 percent to $3,799 million, which was an increase of 9 percent in constant currencies. Nike's Ebit in the region advanced by 7 percent to $1,042 million.

Without currency changes, the Nike brand's turnover moved up by 26 percent in Central & Eastern Europe (CEE), with double-digit growth in all areas other than Greece. The increase amounted to just 2 percent in dollars, due to the weakness of the ruble and the Turkish lira, among others. On the back of strongly increased gross margins, Ebit for the region soared by 42 percent.

The Emerging Markets region started the fiscal year with a quarterly sales increase of 19 percent in constant currencies for the Nike brand. Sales amounted to $966 million, up by 3 percent in dollars, and Ebit reached $258 million, surging by 65 percent.

The improvement was driven by Mexico, where Nike's business was hurt by warehousing issues in previous quarters. As part of its efforts to upgrade distribution, it opened the House for Her in Mexico City and reinforced partnerships with retailers such as Liverpool, Mexico's largest department store. Sales were flat in Brazil, which Nike attributed mostly to economic tension. The brand is claiming market share gains and continuing to implement its category offense strategy in Brazil.

Appetite for Nike products is apparently undiminished, with reported futures for the Nike brand up by 17 percent in constant currencies and 9 percent in dollars. The underlying increases amount to 15 percent for North America, 22 percent for Western Europe, 16 percent for CEE, 27 percent for China, 26 percent for Japan and 6 percent for Emerging Markets. These futures for the Nike brand exclude equipment, at-once and close-out sales as well Nike's own retail sales.

The Converse brand's turnover advanced by 3 percent in constant currencies but it dipped by 3 percent in dollars to $555 million. The underlying growth was driven by the U.S. while sales were down in the U.K., where Converse had enjoyed rapid growth last year after the takeover of its own distribution.

Nike's new chief financial officer, Andy Campion, indicated that quarterly comparisons would be somewhat uneven for Converse as the brand shifts to a more direct operating model in foreign markets. Converse's Ebit decreased by 21 percent to $147 million for the quarter, due to the sales dip in the U.K. along with investments in infrastructure and intellectual property.

For the second quarter, Nike predicts a mid-single-digit sales increase in dollars, along the same lines as in the first quarter, meaning low-teens growth in constant currencies. The outlook has slightly improved for the full fiscal year until the end of May, but the company still predicts reported revenue growth to be squarely in the mid-single-digit range. The gross margin is expected to expand by about 25 basis points, as the company rapidly clears excess inventory in North America caused by congestion in West Coast ports earlier this year. For the full fiscal year, the gross margin is to expand by about 50 basis points.