Robust quarter for Nike in a choppier market

Nike produced yet another robust quarter for the three months until the end of February, with just a few less favorable developments such as the impact of the labor dispute in West Coast ports, the remnants of warehousing issues in Mexico and a realignment in Brazil.

Mark Parker, the company's president and chief executive, said in a conference call that the market environment was becoming choppier, due to the strength of the dollar and other currency issues. However, he said these circumstances were giving Nike the opportunity to take advantage of its global scale and brand strength.

The Nike group's revenues increased by 7 percent to $7,460 million for the quarter, which amounted to an increase of 13 percent in constant currencies. The turnover of the Nike brand alone rose by 11 percent in constant currencies, with improvements in all geographic areas. The group pointed to basketball and sportswear as two of the most buoyant categories. In reported terms, the Nike brand's sales advanced by 6 percent to $6,939 billion for the three months, which form the third quarter of its fiscal year.

For the Converse brand, sales amounted to $538 million, up by 28 percent in dollars and by 33 percent in constant currencies. The brand continued to expand in North America and the numbers were supported by changes in the timing of shipments, but they were also inflated by a transition from a licensing agreement to direct distribution in Austria, Germany and Switzerland from June 2014.

Demand remains vigorous as futures orders for the Nike brand jumped by 11 percent in constant currencies at the end of the quarter, with a rise of 6 percent in average selling prices and 5 percent in units. Orders inflated at double-digit rates in constant currencies in North America, China, Japan and Central and Eastern Europe.

This was achieved despite the fact that the same period in the previous year had included orders for products relating to the football World Cup. Excluding this impact, the company estimates that orders would have increased in the mid-teens. But with this factor and due to the weakening of several important currencies against the dollar, orders were up by just 2 percent in reported terms.

The group's gross margin was up by 1.4 percentage points to 45.9 percent for the quarter. Product and warehousing costs increased, but this was more than compensated for by a more judicious product mix. Marketing expenses were about flat but Nike spent more on own retailing, infrastructure and digital investments. The group's operating profit (Ebit) reached $1,052 million for the quarter, up by 18 percent, with increases of 13 percent for the Nike brand and 23 percent for Converse.

The Nike group ended the quarter with net profit up by 16 percent to $791 million. Given a 2 percent decline in the weighted average diluted common shares outstanding, diluted earnings per share were up by 19 percent to $0.89. Nike repurchased 6.5 million shares for about $612 million in the quarter as part of its four-year, $8 billion program. As of the end of the quarter, 74.1 million shares had been repurchased for about $5.3 billion under this program.

For the first three quarters of the fiscal year so far, Nike's sales were up by 12 percent to $22,822 million. Its gross profit margin advanced by 1.4 percentage point to 45.9 percent and Ebit improved by 20 percent to $3,177 million. The Nike group ended the nine months with net income of $2,408 million, up by 21 percent.

For the last quarter of its fiscal year, which will end in May, Nike predicted a sales increase in the low double digits in constant currencies, but translated into U.S. dollars, the reported sales should end up about 8 to 9 percentage points lower than in the same period a year ago. For the full year, Nike would then report sales growth in the low teens in constant currencies and reported sales down by about 4 to 5 percent.

The gross margin should be roughly flat or to 25 basis points higher for the quarter, due to more closeouts in North America and Europe, and this will strongly mitigate the impact of a more favorable mix of products and sales. For the full year, the company predicts that its gross margin will expand by about 1.0 percentage point. For the next financial year, the company already anticipates sales growth slightly above its high-single digit target range in constant currencies.

With its ongoing efforts to lift gross margins, Nike says it would have expected earnings per share to grow at or above its long-term mid-teens target in the next fiscal year, but its performance will be affected by changes in currency exchange rates. Should they stay at the current level, reported sales will likely expand in the mid-single digits next year, while earnings per share should climb in the high-single to low-double digit range.