Nike Zooms Past Revenue and Earnings Forecasts

Iconic shoemaker’s direct-to-consumer sales surged 23% during Q2 FY17

n1Footwear giant Nike Inc. (NYSE: NKE) announced its Q2 FY17 financial results on December 20th, 2016.

Based near Beaverton, Oregon, Nike is the world’s leading designer, marketer, and distributor of athletic footwear, apparel, equipment and accessories for a variety of sports and fitness activities. The Company offers products in eight key categories: Running, Basketball, Football, Men’s Training, Women’s Training, Action Sports, Sportswear and Golf. Nike’s wholly owned subsidiary brands include Converse, which designs, distributes and licenses casual sneakers, apparel and accessories; and Hurley, which designs and distributes a line of action sports and youth lifestyle apparel and accessories. Read more about the Nike’s financial results below.

Q2 FY17 financial highlights

n2Nike’s Q2 FY17 revenues rose 6% to $8.2 billion as compared to the year-ago same quarter and up 8% on a currency neutral basis. Revenues for the NIKE brand were $7.7 billion, up 8% on a constant currency basis, driven by double-digit currency neutral growth in Western Europe, Greater China, and the Emerging Markets as well as in the Sportswear and Running categories. Revenues for Converse grew 5% to $416 million on a currency neutral basis, driven by strong growth in North America. In North America, which accounts for roughly half of the Nike brand’s sales, revenue grew 3%. Direct-to-consumer (DTC) sales, which include Nike.com and its branded stores, surged 23% during the reporting quarter.

However, gross margins during Q2 FY17 contracted 140 basis points to 44.2% as higher average selling prices were offset by higher product costs, unfavorable foreign currency exchange rates, and higher off-price sales. On the brighter side, selling and administrative expenses declined 2% to $2.5 billion during the quarter under review. Demand creation expense was $762 million, relatively unchanged from the prior year. Operating overhead expenses fell 3% to $1.7 billion, as continued investments in DTC were offset by productivity gains compared to the prior year.

During the reporting quarter, other income amounted to $18 million, comprised primarily of non-operating items, and to a lesser extent, net foreign exchange gains. For the quarter, the Company estimates the Y-o-Y change in foreign currency related gains and losses included in other income, combined with the impact of changes in currency exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $29 million.

In all, net income jumped 7% to $842 million, while diluted EPS jumped 11% to $0.50, reflecting revenue growth, selling and administrative expense leverage, and a 3% decline in the n3weighted average diluted common shares outstanding, partially offset by lower gross margin.

In recent quarters, Nike has been facing a slew of pressures, including the rise of athletic apparel retailers such as Under Armour Inc. (NYSE: UA) and Lululemon Athletica Inc. (NASDAQ: LULU). As the popular athleisure style pivots from performance gear to retro fashion, German brand Adidas is also gaining share. There are also broad concerns that the athleisure trend has peaked. To combat the growing industry consolidation, Nike is increasing its network of stores, including setting up a massive flagship that recently opened in New York City.

Other highlights

Inventories: Nike’s inventories grew 9% to $5 billion from November 30th, 2015, due to a 1% increase in NIKE Brand wholesale unit inventories and increases in average product costs per unit primarily due to product mix, as well as higher inventories associated with growth in DTC.

Cash position: Nike’s cash and short-term investments were $5.9 billion, $173 million lower than November 30th, 2015, as growth in net income and proceeds from the issuance of debt in Q2 FY17 were more than offset by share repurchases, higher dividends, investments in infrastructure and a reduction in collateral received from counterparties to foreign currency hedging instruments.

n4Share repurchase: During Q4 FY16, Nike repurchased 17 million shares for approximately $900 million as part of its $12 billion share repurchase program approved in November 2015. As of November 30th, 2016, Nike had repurchased 56 million shares under this program for approximately $3.1 billion.

Futures orders: Futures orders for NIKE Brand footwear and apparel scheduled for delivery from December 2016 through April 2017 is represented by geographical regions. North America future orders fell 4%, Western Europe orders fell 4%, Central and Eastern Europe orders grew 4%, Greater China orders grew 6%, Japan future orders jumped 10%, and Emerging Markets future orders jumped 9%. The NIKE Brand reported futures include orders from external wholesale customers and internal orders from DTC in-line stores and e-commerce operations, which are reflected at prices that are comparable to prices charged to external wholesale customers. Futures orders, a gauge of sales that reflects demand from retail stores, will not be included in earnings releases starting this quarter.

n5Apple Watch Nike+: To further push sales during the peak holiday season, technology major Apple Inc. (NASDAQ: AAPL) announced on October 24th, 2016, that it has teamed up with Nike to launch Apple Watch Nike+, which combines all of the unique features of Apple Watch Series 2 with the new Nike+ Run Club app for health-conscious runners. Apple Watch Nike+ also features exclusive Nike Sport Bands and unique watch faces inspired by Nike’s iconic style that can be easily personalized with apps like Activity Rings, Heart Rate, Stopwatch and Weather.

Apple Watch Nike+ features built-in GPS to track pace, distance, and route and is water resistant for up to 50 meters. It also features training data, including pace, distance and heart rate through the app interface. Priced at $369 for 38 mm and $399 for 42 mm, the product will be available at Apple.com, Nike.com, Apple Stores, select Nike retail stores, select Apple Authorized Resellers, including Best Buy, and select specialty stores and department stores.

Guidance for FY17

Nike expects full-year FY17 revenue to grow in a high-single-digit range.

Stock Performance

n6Nike’s stock stood at $52.30, up 0.98%, at the close on Wednesday, December 21st, 2016, having vacillated between an intraday high of $53.35 and a low of $51.55 during the session. The stock’s trading volume was at 23,207,980 for the day. The Company’s market cap was at $87.74 billion as of Wednesday’s close.

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