Nike Shows Growth Momentum Helped By Strong European Demand

by Trefis Team
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Sports giant Nike (NYSE:NKE) maintained its solid growth momentum in Q1 fiscal 2014 with 8% revenue growth to $7.0 billion. This performance was underscored by broad based growth across geographies (except China and Japan) and different product categories. Diluted earnings per share grew by 37% owing to factors such as gross margin expansion, SG&A leverage, and a more favorable tax rate.

Nike’s gross margin improved by 120 basis points to 44.9% on account of several factors including a decline in raw material costs, a positive shift in sales mix, higher selling prices, fewer discounts and growth in the direct-to-consumer business which were partially offset by increased labor expenses and adverse currency impact. We are encouraged by this gross margin expansion as it has outpaced our previous expectations. We believe the company’s gross margin will continue to expand during the rest of the year as well.

Increased sales in North America, Western Europe and Central and Eastern Europe helped drive the results during the quarter. Moreover, categories such as running, basketball, football (soccer) and men’s training reported higher sales in Q1. The global Nike brand futures orders growth was seen at 10% (in constant currency terms) at the end of August 2013, and hence, we expect the strong growth for the company to continue in the future.

See our complete analysis for Nike

North America continues to fuel the company’s growth

Keeping up growth in its biggest market, Nike brand revenues in North America rose by 9% in Q1. Its strategy to launch innovative products (such as Flyknit, Hypervenom footwear and Tech pack sportswear apparel), enhance its brand connections with customers and expand its distribution channel continued to propel its results in the region.  The futures orders growth from North America was seen at 12% (excluding currency changes) at the end of August 2013. Hence, we expect this region to remain a strong growth market for the company in the future.

European results have outpaced expectations

Nike brand revenues in Western Europe grew by 8% (in constant currency terms) in Q1 outpacing our previous expectations. This was driven by increased demand from regions such as the U.K, Austria, Switzerland and Germany which helped the company offset macroeconomic challenges in Southern Europe. We are encouraged by this performance as the company has achieved this growth on top of difficult y-o-y comparisons. With the futures orders growth being recorded at 12% (excluding currency changes) at the end of August 2013, we expect the robust growth to continue in this market.

Nike also reported promising results in Central and Eastern Europe where its brand revenues rose by 10% (in constant currency). Strong demand from Russia, Turkey and Poland drove the results in this region. EBIT from this region increased by 50% owing to revenue growth, gross margin improvement and decreased demand creation spending. Moreover, the futures orders growth from Central & Eastern Europe was promising at 27% (in constant currency terms) at the end of August,  and hence we believe this region will continue to be a strong growth driver for Nike in the future.

Softer sales in Mexico impacted emerging markets’ results

Nike brand revenues in emerging markets saw 5% growth in Q1 in constant currency terms. However, currency headwinds reduced the growth rate to 1% in dollar terms. While higher demand was seen in Brazil and Argentina, softer results were recorded in Korea and Mexico. Mexican revenues were impacted by certain shipping delays. The futures orders growth from this region was witnessed at 7% (excluding currency changes) and 1% in dollar terms. While currency headwinds will continue to drag results in this region in the near future, we believe the long-term outlook for this market is positive owing to the growing economic prosperity in developing economies.

Chinese results are improving

Nike brand revenues in Greater China declined by 3% in constant currency terms in Q1. Nike continues to make progress in resetting this marketplace by taking steps such as elevating the customer experience at stores and aligning the category offense according to the tastes of Chinese customers. It aims to increase the productivity and profitability of its store base in the region in the future. The futures order growth was recorded at 2% (excluding currency changes) from this region and hence we expect the second quarter results from Greater China to show positive revenue growth. However, the company continues to have a conservative approach on growth prospects from this region and expects fluctuations in Chinese sales during the different quarters of the current fiscal year.

Japanese sales were impacted by weaker yen

While Nike brand sales in Japan increased by 1% (in constant currency terms), it declined by 20% in dollar terms. The weaker yen will continue to pose challenges in the region as the futures orders growth from this region was seen at -19% in dollar terms at the end of August 2013 .

We are in the process of updating our $60.40 price estimate for Nike.

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