Nike’s quarterly profit slips

While demand for Nike products continued to increase rapidly in the quarter until the end of August, the company's profit was under pressure due to lower gross margins and more expenses related to the international sports events held in the summer.

The entire group's sales jumped by 10 percent to $6,669 million, which was a rise of 15 percent in constant currencies for the first quarter in Nike's fiscal year. The Nike brand alone enjoyed a broad-based sales hike of 16 percent in constant currencies, building up to a global turnover of $5,864 million. Furthermore, orders for Nike-branded products were up by 6 percent at the end of the quarter, which was an increase of 8 percent in constant currencies. This was driven by increases of 5 percentage points in units and 3 percentage points in the average price per unit.

Running was among the stand-out categories. It reaped double-digit sales growth for the tenth quarter in a row. Nike's sales of running products expanded by 50 percent compared with two years ago. For the first time this quarter, the women's running business inflated faster than the men's business. Basketball, football and men's training were three other categories that also delivered double-digit sales hikes.

The robust rise in the Nike brand's turnover was fueled by a jump of no less than 23 percent in North America, to $2,706 million, with increases of at least 20 percent each in apparel, footwear and equipment. The group's operating profit (Ebit) shot up by 17 percent to $630 million in North America. Just as remarkably, North American orders for the Nike brand were up by another 13 percent at the end of the quarter.

The quarter was impacted by the start of Nike's licensing business with the National Football League (NFL). But more broadly, Nike executives praised this unabated expansion in the brand's own and largest market on its category offense strategy, which has seen Nike explore its potential more thoroughly in different sports categories. The same strategy is being deployed in other regions and Nike executives expect to reap the rewards in the coming quarters.

After several sluggish quarters, the Nike brand's sales picked up in Western Europe, with sales going up in all areas except in Iberia and Italy. They were down by 5 percent in reported terms to $1,167 million but up by 6 percent in constant currencies, driven by footwear. Nike pointed to the strong impact of the European football championships, as replica sales were strong and sales of cleated footwear expanded at a double-digit rate in Western Europe.

Charlie Denson, president of the Nike brand, said that the company's Ebit in the region went up in constant currencies, in spite of generous investments in the European championships and the London Olympics, and orders advanced by 6 percent. In reported terms, the regional Ebit dropped by 4 percent to $214 million and orders slipped by 1 percent.

The Nike brand's sales continued to expand rapidly in Central and Eastern Europe, up by just 2 percent to $342 million in dollars but ahead by 16 percent in constant currencies. Turkey and Russia both turned in strong double-digit growth. The performance included a 22 percent jump in apparel sales. Then again, Ebit in Central and Eastern Europe fell by 13 percent to $61 million, due to marketing investments and weaker currencies. Orders were up by 4 percent in dollars and by 7 percent in constant currencies.

Nike executives were particularly eager to reassure investors about its situation in China, as the group reported a currency-neutral drop of 6 percent in orders for the Nike brand in this hitherto fast-expanding market. The brand's Chinese growth had already been eroding in the last quarters, amid an increasingly tight apparel market.

For the quarter until the end of August, the Nike brand's sales in China were still up by 8 percent to $572 million, a rise of 7 percent in constant currencies. Apparel sales shrank by 1 percent in renminbi. The group's Ebit in China declined by 4 percent to $164 million due to heightened investments in marketing and operations. Orders were off by 5 percent in dollars, with decreases across footwear and apparel, and in sportswear as well as in performance products.

In their conference call around the results, Nike executives went out of their way to discuss measures taken in China to strengthen the brand's performance in the long term. Nike will come up with products that are more adjusted to Chinese consumers, and to specific retailers. It will tighten its futures orders to make sure that it has a quality order book. And Nike will continue to work with retailers to help clean up inventories that have been disrupting the market for several quarters.

Nike executives warned that, combined with the slowdown in China's economic expansion and the upheavals in the broader Chinese sports market, the group's assertive strategy could have an unsettling impact on its results in the short term. But in the end, they expect to see improved inventory turns for retailers and better store productivity, which are required for a sustainable business in China.

Japan was the only region where the Nike brand's sales were down for the quarter, by 6 percent in reported terms to $183 million, and by 7 percent yen. The drop was entirely due to apparel and equipment, while footwear sales were nearly stable, up by 1 percent in constant currencies. The group's Japanese Ebit shrank by 29 percent to $24 million. Japanese orders for the Nike brand were up by 5 percent in dollars and by 7 percent in yen.

Emerging Markets delivered a sales hike of 8 percent to $867 million, up by 22 percent in constant currencies, with double-digit increases in all countries and all but one key sports category. Ebit for the region went up by 17 percent to $223 million and orders for the Nike brand jumped by 14 percent in constant currencies.

Sales for the Other Businesses unit, comprising Converse, Hurley and Nike Golf, advanced by 9 percent in constant currencies as well as in reported terms, to $635 million. Converse's turnover expanded at low double-digit rate, compared with mid-single digit rates at Nike Golf and Hurley. Ebit for these other businesses climbed by 16 percent to $121 million.

These results exclude the Cole Haan and Umbro brands, which the group said it wanted to divest. Their joint sales climbed by 4 percent to $195 million, up by 6 percent in constant currencies. Their combined losses remained unchanged with negative Ebit of $18 million, with better results for Cole Haan offset by a decline for Umbro.

The group's gross margin contracted by 0.8 percentage points to 43.5 percent, which was a smaller rate of decline than expected. Nike took many measures to mitigate cost pressures, but it still suffered from heightened costs for materials and labor. Another negative factor was that the mix of Nike's sales slightly shifted to lower-margin products, particularly in the North American market. The fact that Converse took over its own distribution in China also impacted the group's gross margin.

While the input cost pressure is starting to ease, the company warned that its gross margin should start to suffer from the added pressure of weaker currencies from the second quarter of its fiscal year. Nike predicts that its gross margin will expand in the second half of the fiscal year, and that it will be flat for the full year.

Meanwhile, the company's expenses shot up by 18 percent to $2,153 million, faster than sales. This was mostly due to a jump of 29 percent to $891 million in marketing expenses, to support the Nike brand at the European football championships and the London Olympics. The company also dipped into the marketing budget to support NFL product launches.

Ebit for the Nike brand slid by 2 percent to $941 million for the quarter. As for the entire group, its Ebit contracted by 9 percent to $779 million and its net income ended at $567 million for the quarter, down by 12 percent.

For both the second quarter and the full year, excluding Cole Haan and Umbro, Nike expects sales to expand at a high-single digit to low double-digit rate in constant currencies. Due to the relative weakness of the euro and other currencies, however, sales should increase at a mid- to high single-digit rate in reported terms.