Sports giant Nike (NYSE:NKE) recorded another strong quarter in Q4 2013, with revenue rising by 7% annually to $6.7 billion. Gross margin expanded by 110 basis points y-o-y, helped by higher selling prices and lower raw material costs, which were partially offset by increase in labor wages, higher discounts (primarily in the Chinese market) and currency headwinds. Over the entire fiscal year 2013, the company saw 8% revenue growth, with 10 basis point improvement in gross margin.
The company’s strong performance in Q4 2013 was underscored by high growth in North America, Central and Eastern Europe and emerging markets. High demand in running, basketball and football categories continues to fuel the growth momentum for Nike. Chinese sales saw some recovery in Q4 2013, however, the company’s outlook on this market in fiscal 2014 continues to be conservative.
Nike forecasts revenue growth in the high single digits in fiscal 2014, with 25 basis points improvement in gross margin. We believe the company’s gross margin improvement could be higher than estimated in fiscal 2014, if it is able to achieve recovery in in China sooner, and if the currency headwinds soften over the year. The Chinese market is highly profitable for Nike and recovery in this market will boost the company’s profitability.
Organizational changes at Nike
Nike has undergone certain organizational changes in the recent past. Key among them is the retirement of Charlie Denson (Nike brand President) in January 2014, who will be replaced by Trevor Edwards (currently EVP of Brand and Category Management) effective July 1, 2013. With these strategic management changes, the company aims to enhance its focus on areas such as innovation and design.
Running, basketball and football represent the key growth categories for Nike
Running, basketball and football are the key categories that are helping Nike maintain its strong growth momentum. Innovative technologies such as Nike Air, Lunar, Flyknit, Free and Dri-Fit are fueling growth in the running category. The basketball category is being driven by partnership with leading basketball players and participation in major tournaments across the world. We expect the growth in the football category to accelerate in the future due to major sporting events, such as the 2014 FIFA World Cup.
North American results continued to outperform in Q4
Keeping up growth in its biggest market, Nike recorded 12% annual revenue growth in North America in Q4 2013. Strong growth in basketball, men’s training sportswear and running are driving high demand in this geography.
Nike’s strong run in this market continues to be fueled by its category offense (focusing on discrete categories), superior innovation, strong marketing and premium distribution. With North American futures orders growth at 12% at the of May 2013, we expect this market to continue its strong growth in the future.
Emerging markets will see high demand in the future
Nike brand revenues in emerging markets, rose by 16% annually (in constant currency terms) in Q4 2013. Strong growth in Brazil, Argentina and Mexico underscored this performance. Since Brazil is expected to hold major sporting events in the future, including FIFA World Cup and Olympics, we see this geography as a major revenue growth driver for the company. Futures orders growth from emerging markets stood at 12% at the end of May 2013.
Update on Chinese results
In line with our expectations, Chinese results improved in Q4 2013. Nike brand revenues in Greater China saw 1% annual decline (in constant currency terms) in Q4 as compared to 10% currency-neutral decline in the previous quarter. Nike is aggressively taking steps to return to growth in this region by reducing its inventory, enhancing its marketing activities, creating differentiated product portfolio, and improving the productivity of its store base in China. While these efforts are bringing in progress, the company’s management indicated that it is still in the process to achieve sustainable growth in the region.
While the futures order growth from Greater China at the end of May was flat (in constant currency terms) as compared to the prior year, Nike’s management expects revenue from this region in the first half of fiscal 2014 to be lower as compared to the previous year, as it continues to manage the inventory in the marketplace. Nike expects recovery in Greater China in the second half of fiscal 2014, with revenues stabilizing around prior year levels.
We believe these forecasts represent conservative approach of Nike’s management. In the event, Nike is able to turn around this market faster than expected, we will see the company outpacing market expectations in fiscal 2014. Hence, this is an area to watch.
European results were mixed with Central and Eastern Europe posting high growth
Nike brand revenues in Western Europe posted flat growth (in constant currency terms) in Q4 2013, as compared to the prior year on account of difficult y-o-y comparisons. While strong growth was seen in Austria, Germany and Switzerland, the company faced challenges in the Southern markets of Italy and Spain. Futures orders growth from this geography was flat (excluding currency changes) at the end of May, 2013.
Nike brand revenues in Central and Eastern Europe saw 11% annual revenue growth (in constant currency terms) in Q4 fueled by high demand in Turkey and Russia. We expect high growth in this market over fiscal 2014 due to growing economic prosperity in the region. Recent futures order growth at 12% (in constant currency terms) supports our outlook.
Outlook for Q1 fiscal year 2014 
– Revenue to rise at a mid to high single digit rate.
- Q1 gross margin to be in line with the previous year as the benefits from lower raw material costs and higher selling prices will be offset by increase in labor wages and currency headwinds.
- SG&A expenses will increase at a low single digit rate on account of easier y-o-y comparisons.
We are in the process of revising our $58 price estimate for Nike’s stock.Notes:
- Nike’s CEO Discusses F4Q 2013 Results – Earnings Call Transcript, Seeking Alpha, June 27, 2013 [↩]