Strong Showing In China, Europe and North America Keeps Nike’s Topline Growth Rate Humming Nicely

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Sports giant Nike (NYSE:NKE) recorded another strong quarter in Q1 2015, with revenue rising by 15% annually to $8 billion. [1] Gross margin expanded by 170 basis points y-o-y, helped by a greater presence of higher margin products in the sales mix, higher average selling prices and continued growth in the higher margin direct-to-consumer (DTC) business, which were partially offset by an increase in input costs. [1] The company’s strong performance in Q1 2015 was underscored by high growth in North America, Western Europe and China. High demand in running, basketball and football categories continue to fuel the growth momentum for Nike. Sales of Nike brand footwear grew by a staggering 29% in China, resulting in an 18% revenue growth for the quarter. Nike Brand DTC was up 30% for the quarter, driven by comparable store sales growth of 15%, new store expansion, and accelerated growth in online sales of 70%. [1]

We are in the process of revising our $68 price estimate for Nike’s stock.

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North America Continues To Be Strong

North America continues to be a growth driver for the company with revenues up 12% for the quarter. [1] The company’s continuous strong performance in the continent is proof of the incredible results it can deliver with the category offense strategy. Over the quarter, Nike saw growth in nearly every dimension of its business: wholesale and DTC, in line, factory, and online, in nearly all key categories and across its men’s, women’s, and young athletes businesses. The remarkable performance in this geography shows the strength of the Nike brand as it has managed to capture the growth in the market and take market share from an ever rising number of competitors at the same time. The company is a market leader in the basketball and running categories, and leverages the insight gained from those segments to capture the significant growth opportunities in areas like e-commerce, apparel, women’s and young athletes businesses. Nike applies discrete strategies to individual segments, identifying the opportunities in each category and applying different strategies to capitalize on these opportunities, instead of applying a one-size-fits-all strategy common to the sportswear market.

Remarkable Turnaround In China

In stark contrast to our expectations, sales in China only grew by 18% for the quarter. Given that China is one of the largest markets for athletic footwear and apparel in the world, the geography provides a significant growth opportunity for Nike. We have already written about the problems Nike faces in establishing a strong foothold in this market. (See: Nike’s China Problem) However, over the quarter, the company managed to grow its revenues by nearly 20% driven by a 30% comparable store growth through its Direct to Consumer stores.

Previously beset by the accumulation of unsold inventory and indifferent response to new product launches, Nike decided to reset its strategy for China in fiscal 2014. The company has made good progress on that front and expects to achieve sustainable double-digit growth from the region soon. In 2014, Nike tested new merchandising concepts in China, which drove comparable store sales for the quarter up 30%. [1] In the previous quarter, the sports retailer also changed the assortment of inventory it sells to wholesale partners in China, undertook the re-profiling of multiple stores in the region and reduced the levels of inventory considerably. Tese newly re-profiled stores now form an increasingly large part of Nike’s business in China, and any profitability gains made from these stores are likely to result in strong profits before interest and taxes for the company.

Europe Continues To Surprise

Nike brand revenues in Western Europe grew by 32% (in constant currency terms) in Q1 2015, further confirming that Nike is gaining ground over market leader Adidas. [1] Similar to the operations in China, Nike’s European Operations were also rebased two years ago. The company introduced shop-in-shop concepts at sports retailers like JD Sports, Foot Locker and Intersport, in addition to trying out new store concepts in its own retail stores and online. The strategy has been successful, with Nike now the leader in the footwear market in all countries key to its business in Europe and is the preferred sports brand in each of the top 10 cities in Western Europe. For the full year, earnings before interest and taxes grew by over 50% in Western Europe, more proof that the company is gaining significant returns on its investments in the region. Nike brand revenues in Central and Eastern Europe saw 7% annual revenue growth in Q1 fueled by high demand in  Poland, Greece and Turkey. [1] We expect high growth in this market in fiscal 2015 due to growing economic prosperity in the region. Recent futures order growth at 11% (in constant currency terms) supports our outlook. [2]

Outlook for Q1 fiscal year 2015

The company issued the following guidance for the second quarter of fiscal 2015:

  • Revenue to rise at a low double-digit rate, driven by strong consumer demand for Nike’s products in key markets such as North America and Europe.
  • Q2 gross margin to be 125 to 150 basis points higher than previous year due to a shift in mix to higher margin products, higher average selling prices, as well as ongoing strength in the higher margin DTC business.

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Notes:
  1. NIKE’s CEO discusses F1Q2015 Results, Seeking Alpha, September 2014 [] [] [] [] [] [] []
  2. NIKE, Inc. Reports Fiscal 2014 Fourth Quarter and Full Year Results, Businesswire, September2014 []