Nike (NKE, Financial), based near Beaverton, Oregon, is the world's leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. It is one of the leading athletic apparel and footwear enterprises and has its presence in approximately 190 countries around the world.
Strong Results
NKE reported financial results for its fiscal 2015 second quarter ended November 30, 2014. Strong consumer demand drove revenue growth across the portfolio. Diluted earnings per share grew faster than revenue, up 25 percent, primarily due to gross margin expansion and a lower average share count, which more than offset higher SG&A investments in NIKE, Inc. brands and business capabilities.
“Our strong second quarter results once again demonstrate NIKE is a growth company,” said Mark Parker, President and CEO of NIKE, Inc. “The power of our portfolio continues to unlock growth, as we keep a laser focus on our biggest opportunities. The breadth and depth of that portfolio has helped us consistently deliver strong results – quarter after quarter, year after year.”
Revenues for NIKE, Inc. increased 15 percent to $7.4 billion, up 18 percent on a currency neutral basis.
- Revenues for the NIKE Brand were $7.0 billion, up 17 percent on a currency neutral basis, with growth in every product type, geography and key category, except Golf.
- Revenues for Converse were $434 million, up 24 percent on a currency neutral basis, driven by continuing growth in existing direct distribution markets as well as market conversions in Europe and Asia.
Gross margin increased 120 basis points to 45.1 percent. The increase was primarily attributable to a shift in mix to higher margin products, continued growth in the higher-margin Direct-to-Consumer (DTC) business and a modest benefit from foreign exchange. These positive factors were partially offset by higher product input costs.
Selling and administrative expense increased 17 percent to $2.4 billion. Demand creation expense was $766 million, up 11 percent versus the prior year, driven by marketing support for new product launches, digital brand marketing and consumer events. Operating overhead expense increased 19 percent to $1.7 billion, reflecting growth in the DTC business, as well as investments in operational infrastructure and digital capabilities and engagement.
Other expense, net was $2 million, comprised primarily of foreign exchange losses, partially offset by other non-operating items. For the quarter, the Company estimates the year-over-year change in foreign currency related gains and losses included in other expense, net combined with the impact of changes in currency exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $39 million.
The effective tax rate was 25.4 percent, a 20 basis point increase primarily due to adjustments to tax expense on intercompany transactions and the benefit realized in the prior period from the U.S. Research and Development tax credit. These factors were partially offset by an increase in earnings from operations outside the U.S., which are generally subject to a lower tax rate, and the resolution of tax audits across multiple jurisdictions.
Net income increased 23 percent to $655 million, while diluted earnings per share increased 25 percent to $0.74, reflecting strong revenue growth, gross margin expansion and a 3 percent decline in the weighted average diluted common shares outstanding.
Inventories for NIKE, Inc. were $4.2 billion, up 11 percent from November 30, 2013, driven by a 9 percent increase in NIKE Brand wholesale inventories as well as higher inventories associated with growth in DTC and Converse. NIKE Brand wholesale inventories were higher due to a 14 percent increase in units, while changes in the average product cost per unit, combined with the impact of changes in foreign currency exchange rates, decreased growth by approximately 5 percentage points.
Cash and short-term investments were $4.7 billion, $474 million lower than last year as growth in net income and collateral received from counterparties to foreign currency hedging instruments was more than offset by share repurchases, higher dividends and investments in working capital.
Share Repurchases
During the second quarter, NIKE, Inc. repurchased a total of 5.1 million shares for approximately $425 million as part of the four-year, $8 billion program approved by the Board of Directors in September 2012. As of the end of the second quarter, a total of 67.6 million shares had been repurchased under this program for $4.7 billion, an average cost of approximately $68.96 per share.
Futures Orders
As of the end of the quarter, worldwide futures orders for NIKE Brand athletic footwear and apparel, scheduled for delivery from December 2014 through April 2015 were 7 percent higher than orders reported for the same period last year. Excluding currency changes, reported orders would have increased 11 percent.
(Source: Company’s Website)
Focus on Women’s Business
NKE is currently focusing on expanding its women’s business segment. Amy Montagne has been appointed VP, GM of NIKE Women’s. Montagne will be responsible for expanding NIKE’s brand position with women and continuing to drive the current momentum within NIKE’s women’s business.
“With such an explosion of creativity in sport and a growing lifestyle that seamlessly integrates her run and workout with the rest of her day, Nike has never been better positioned for growth,” says Amy Montagne, VP/GM of Nike Women. “Today we’re introducing the most comprehensive and innovative women’s collection Nike has ever created.”
NKE expects that its women’s business revenue may grow up to $7 billion by 2017. The company garners about $5 billion annually from its women customers. NKE has targeted to push its sales up by 40% in the coming five years.
NKE has already started rolling out women’s stores, the most recent in this league being the one opened in Newport Beach in California. This store has its personal styling and fitting amenities. “The NIKE Brand is expected to deliver nearly $10 billion in incremental revenue by Fiscal 2017, and our apparel, women’s and eCommerce businesses will support this growth,” said Trevor Edwards, president of the NIKE Brand. “Over the last three years, the NIKE Brand has grown close to 40 percent, and we will continue to innovate and grow by focusing on products and services that capture the imagination of our consumer and help athletes perform at their highest potential.”
Women all over the world are choosing to work out and run with Nike. The Nike+ Training Club App for women has been downloaded 16 million times and 9 million women have downloaded the Nike+ Running App. The Nike+ digital community is a global ecosystem of inspiration and optimism, using knowledge and community to motivate. By offering athletes at every level a better understanding of themselves, Nike serves as the direct link between the female consumer and her goals.
Sport and fitness are powering a new lifestyle shift for women around the world,” says Mark Parker, president and CEO of NIKE, Inc. “Our relationship with our digital community of 65 million women, coupled with great product innovation, is driving our momentum and we expect to add another $2 billion in revenue to reach $7 billion by FY17.”
To End
Today, Nike continues to seek new and innovative ways to develop superior athletic products, and creative methods to communicate directly with their consumers. NKE is a hit among the brand-conscious consumers, and customers don’t mind paying extra for this brand. It definitely lives up to its slogan, “Just Do It.” Nike’s tremendous financial performance will help the company stay a step ahead of its competitors.
It has already witnessed tremendous success in the North American region. The Asian countries hold tremendous opportunities for this company. With robust innovation, continuing research and development activities Nike is bound to create shareholder returns.
NKE has always liked being on the top and has diligently worked towards it. Innovation has clearly been a part of its strategy. No wonder NKE is pushing its resources to woo its women customers. It is capturing broader fashion trends in the women’s fashion market.
The incline towards stylish and comfortable clothing, rise in disposable levels of income and a sudden increase in fitness-conscious people will boost the company’s growing popularity. The next few years may see the company shifting its focus towards other stylish accessories like sunglasses, etc. Innovation has always played a key role in Nike’s success.
Working out will never go out of fashion, and women play an integral part in fashion trends. NKE has a good future as regards the women’s business segment. NKE has tremendous growth potential in this area.
