Earnings Review: Nike Continues To Grow On Higher Comparable Sales, More Profitable Sales Mix

Sports giant Nike (NYSE:NKE) recorded another strong quarter in Q3 2015, with revenue rising by 7% annually to $7.5 billion. Gross margin expanded by 140 basis points y-o-y, on the back of a shift in the sales mix to higher margin products, and continued growth in all product types, geographies, and the higher margin direct-to-consumer (DTC) business, partially offset by an increase in input costs. The company’s strong performance in Q3 2015 was underscored by high growth in North America, Western Europe, and Greater China. High demand in running, basketball, and football categories continue to fuel the growth momentum for Nike. Additionally, Nike Brand DTC was up 29% for the quarter. ^[1]

We are in the process of revising our $85 price estimate for Nike’s stock.

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North America Continues To Be Strong

In fiscal 2014, Nike recorded its most profitable year ever in North America with reported earnings before interest and tax rising faster at 14% than reported revenues (10%). That momentum has continued into this year with North America revenue growing by 18% in the first nine months, led by strong growth in basketball, sportswear, and men’s training, along with modest growth in the women’s training and young athletes businesses.  ^[2]

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.

China Turnaround Underway

The company’s performance in China exceeded our expectations this quarter. In the previous quarter, China revenues grew by 17%. 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) But Nike’s strong performance over the past two quarters has helped Nike achieve the leading position in both the athletic footwear and apparel markets.

Previously beset by the accumulation of unsold inventory and an  indifferent response to new product launches, Nike decided to reset its strategy for China in fiscal 2014. The company believes that it has made good progress on that front and expects to achieve sustainable double-digit growth from the region soon. 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. However, Nike has positioned itself as a relatively premium brand in China compared to its brand positioning in Europe and North America. As a result, its wholesale partners are seeing strong comparable store sales growth and the profitability of stores that were re-profiled is also increasing.

Europe Continues To Surprise

Nike brand revenues in Western Europe grew by 23% (in constant currency terms) in Q3 2015, further confirming that Nike is gaining ground over market leader Adidas. Similar to the operations in China, Nike undertook a rebasing of its operations in Europe 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.

Nike brand revenues in Central and Eastern Europe saw 7% annual revenue growth in Q3 fueled by double-digit growth in every geography except Israel. ((Ref:2)) We expect high growth in this market in fiscal 2015 due to growing economic prosperity in the region. Recent futures order growth at 18% (in constant currency terms) supports our outlook. ^[3]

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1. NIKE, Inc. Reports Fiscal 2014 Third Quarter Results, Business Wire, March 2014 [↩]
2. NIKE’s CEO discusses F3Q2015 Results, Seeking Alpha, March 2015 [↩]
3. Ref: 1 [↩]