Nike Scores In Key Markets As Outlook Improves

Nike (NYSE:NKE) reported an impressive performance in Q3 2013 with 9% y-o-y growth in top-line. Higher demand in North America, Europe and emerging markets underpinned this strong performance. Further, its gross margin expanded by 30 basis points annually to reach 44.2% in Q3 2013 owing to higher prices and lower raw material costs, which were partially offset by an increase in labor wages and higher discounts. Nike’s global futures orders also rose by 6%. ^[1]

Going forward, we expect Nike to record continued growth in North America, Europe and emerging markets. Southern Europe may remain challenging in the near term but the outlook from the rest of Europe is positive. Within China, we expect the company to face challenges in the short term as it works towards reducing its inventory. Over the long run, we expect Nike to recover its growth in China. Futures orders reported were up by 4% from the region, indicating a positive trend.

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North America, Emerging Markets, and Europe Showed Growth In Revenues

Nike brand revenues in North America grew by 18% annually in Q3 2013 due to higher demand in basketball, men’s training, running and sportswear categories. The company maintained strong growth momentum in North America which helped it gain market share in the region. We think Nike will continue to outperform in North America in the future owing to its strategy of launching innovative products and superior marketing. ^[1]

Nike brand sales in Western Europe and Central & Eastern Europe increased by 8% and 16% y-o-y, respectively, during the quarter. The company is seeing mixed trends in different markets of Europe. While demand is growing in Germany, the UK, and the developing countries of Central and Eastern Europe (especially Russia and Turkey), Southern Europe continues to be a challenging market due to macro headwinds in the region. We think European revenues will continue to post growth in the future owing to increasing demand from the region. However, if the euro weakens, it could present headwinds to Nike’s revenues. Futures orders from Western Europe fell by 5% due to difficult y-o-y comparisons as sales in the prior year were fueled by Euro Champs and Olympics. In contrast, futures orders from Central & Eastern Europe rose by 11%.

Emerging markets’ revenues grew by 6% annually (in dollar terms) and by 8% (in constant currency terms) in Q3 2013. While higher demand was recorded across different markets in this category, the growth was comparatively weaker in Korea and Argentina reflecting the macro economic conditions in these countries. Future orders from emerging markets were up by 16% (in constant currency terms) indicating high demand from the region.

China and Japan Remain Troubling Spots For Nike

As expected, Nike brand revenues from Greater China declined by 9% in Q3 2013. In the past few quarters, Nike’s Chinese sales have been affected by excess inventory and macro headwinds. However, the company is aggressively taking steps to recover its growth pace in China. In the short term, Nike is clearing its excess inventory by offering discounts. For the long term, it is adapting its products to suit Chinese tastes and preferences. It is also strengthening its brand connections with consumers and bolstering the productivity of its stores in China. While the Chinese market is expected to remain challenging in the near term, we expect Nike’s actions to result in higher demand for its products in the long run. Chinese demand for athletic apparel and footwear products will grow rapidly in the future and we expect this to bode favorably for Nike.

In an encouraging sign, Nike’s future orders from Greater China were up by 4%. While the company specifically mentioned that future orders were not reflective of its expected revenue growth from China in Q4 2012, we think this factor indicates that demand may be starting to pick up in the region. ^[1]

Revenues from Japan dropped by 6% annually in constant currency terms and by 13% in dollar terms owing to the weaker yen. The weakening yen continues to be a headwind for Nike as future orders from Japan were down by 8% in dollar terms while they rose by 5% (in constant currency terms).

Future Outlook for Q4 2013

– Revenue is expected to rise by mid-single digits on account of difficult y-o-y comparisons as revenue in Q4 2012 was driven by Euro Champs, Olympics and NFL Launch

– Gross margin to increase by 50 basis points compared to the prior year

– Effective tax rate of around 25.5%

We are in the process of updating our $56 price estimate for Nike’s stock.

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1. Nike’s CEO Discusses F3Q 2013 Results – Earnings Call Transcript, Seeking Alpha, March 21, 2013 [↩] [↩] [↩]