This summary is based on the first quarter fiscal 2009 earnings call conducted by NIKE Inc. (NKE) on September 24, 2008.
Management:
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President, Chief Executive Officer, Director: Mark G. Parker
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President, Nike Brand: Charles D. Denson
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Chief Financial Officer, Vice President: Donald W. Blair
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Vice President, Investor Relations: Pamela Catlett
Key Investors Issues
- Revenue rose 17% to over $5.4 billion from $4.7 billion in 2007.
- Earnings were $510.5 million or $1.03 a share, down 10%.
- The board authorized a new four-year, $5 billion share repurchase program to begin as soon as the current program is completed.
First Quarter Highlights
Revenue grew 17% to over $5.4 billion from $4.7 billion in the prior year as currency changes contributed about seven points of that growth.
- On a currency neutral basis, Nike brand footwear and apparel futures orders scheduled for delivery from September 2008 through January 2009 grew 9%, up from 8% growth and driven by accelerated growth in orders for U.S. footwear.
- Earnings were $510.5 million or $1.03 a share, down 10% or $569.7 million or $1.12 a share, reflecting SG&A investments this year in comparison against last year’s one-time tax benefit.
- Gross margin grew 240 basis points to 47.2%, somewhat higher than expected due to better exchange rates, effective sourcing cost initiatives, retail expansion, selective footwear price increases, and a shift in mix to higher margin styles.
The upside came primarily as a result of higher margins in the other businesses and less rapid cost inflation in Asia than expected.
- SG&A grew 29%, including five points from currency changes, due primarily to investments in the European football championships and the Beijing Olympics.
- Operating overhead grew 14% on a constant currency basis, driven by investments in infrastructure to support key growth drivers, such as owned retail, emerging markets, and the other businesses.
- On the ground activities around the summer sporting events and increased stock-based compensation expense also contributed to operating overhead growth.
Net interest income was $10 million, $14 million below last year due primarily to lower interest rates.
- The firm generated $249 million of free cash flow from operations, up 10% year-on-year, a key driver being working capital, which reflected a six-day improvement in the cash conversion cycle.
- NIKE repurchased $430 million of stock and paid out $113 million in dividends and expects to complete the current share repurchase program later this year, about 18 months early.
- Earlier, the board authorized a new four-year, $5 billion share repurchase program to begin as soon as the current program is completed.
Strategic Insights:
- While there is financial uncertainty in some sectors, results continue to warrant confidence in the power and flexibility of the businesses.
- Innovative product is at the core of Nike and practically speaking, it’s where consumers cast their vote on the brand.
- The firm landed in Beijing with new footwear and apparel for all 28 Olympic sports and launched Fly Wire technology in the hyper dunk and Zoom Victory Spike as well as Lunar Light Cushioning in the Lunar Racer.
NIKE Brand:
- The brand started with the NBA Finals, where Paul Pierce led the Boston Celtics to their first title in 22 years.
- It also witnessed Tiger’s amazing Monday play-off win at the U.S. Open, and then Cesc Fabregas and Fernando Torres led Spain to their first Euro title in 44 years, while Rafael Nadal and Roger Federer put on the greatest show ever at Wimbledon.
- The Nike brand generated record revenue of $4.8 billion, up 18% as every region increased revenue.
- Global footwear was up 19% and global apparel was up 18%, and all six of the key categories saw revenue increases year over year, so a really solid performance by the Nike brand in the first quarter.
In the U.S., futures were up and total revenue grew 8% to $1.8 billion, while retail revenues increased 16% with strong performances in running, action sports, and basketball.
- Pretax income increased only 1% as increased demand creation spending partially offset the growth in revenues and margins.
- The strength of the Nike brand in the U.S. is evident by the continued strength of the top retail destinations, with seven out of the 10 largest wholesale partners delivering year-over-year revenue growth with renewed energy from athletic specialty accounts.
- Revenues at Nike owned retail stores in the U.S. grew 16%, while comp store sales at Nike inline stores increased 8% and the e-commerce business grew more than 30%.
U.S. footwear revenues increased 9%, outpacing the market driven by the running, soccer, and women’s training categories within the Nike brand and brand Jordan, which expanded its position as the number two footwear brand in the U.S.
- U.S. apparel revenues grew 9%, driven by double-digit growth in performance products, partially offset by continued weakness in sportswear.
- Turbo U.S. futures grew 3% versus the prior year, powered by strong growth in footwear, partially offset by lower apparel futures, primarily sportswear.
- Sportswear apparel remains a work-in-progress with a lot of momentum in a rising average selling price.
Over in Europe and EMEA, the brand is off to a strong start with football and running leading the way into the future as revenue was up 5%.
- Revenues grew 20%, including 15 points of growth from currency as most countries in the region posted higher sales with footwear and equipment delivering year-on-year growth.
- The emerging markets in the region drove the majority of the growth, partially offset by weakness in Southern Europe.
- Income for Europe grew 17%, reflecting revenue growth, gross margin improvement, and stronger European currencies though growth was tempered by large demand creation investments around the Euro Champs and Olympics.
In the Americas region, revenues grew by 19% and futures are up 24% as football, running, women’s training, and sportswear all had strong double-digit growth.
- Income grew 18% to $69 million, driven by higher revenues, improved gross margins, and overhead leverage.
- Reported growth rates reflect the sale of the Bauer and Starter businesses and the acquisition of Umbro.
- For the continuing businesses, Converse, Cole Haan, Hurley, and Nike Golf, revenue grew 20% and pretax income grew 19%.
- In Asia, revenue was up 26%, including growth in every major country in the region.
- Japan continues to trend up, with revenue growth of 2% and futures are up at 4% and in China, revenue increased over 50%, fueled by retail expansion and highly integrated product brand and retail execution around the Olympics.
- Income for the region grew 15% to $186 million, as revenue growth and higher gross margins more than offset investments in demand creation and China infrastructure.
Fiscal 2009 Outlook:
- For the second and third quarters, the firm continues to expect high-single-digit revenue growth.
- Revenue growth in the fourth quarter will likely be lower, reflecting comparisons against strong sales at the end of last year as it ramped up to the Olympics and Euro Champs.
- It expects the growth in SG&A to decelerate significantly over the balance of the year as it returns to more normalized levels following planned investments in the Olympics and Euro Champs over the last two quarters.
- SG&A growth for the year will be driven by higher demand creation spending and infrastructure investments in emerging markets, retail, and the other businesses.
