Nike’s Q3 Earnings Top Estimates On Digital Momentum

Nike’s Q3 Earnings Top Estimates On Digital Momentum

Nike Inc. reported quarterly earnings that slightly topped analysts’ expectations and sales that were in-line. The 7-percent revenue growth was driven by broad-based strength across all geographies as well as Nike Direct, led by digital. By region, the gains were led by Greater China, up 23 percent; followed by EMEA, 9 percent; and North America, 7 percent.

“In Q3, our team once again drove strong, healthy growth across Nike’s complete portfolio,” said Mark Parker, Chairman, President and CEO, Nike, Inc. “Our business momentum is being accelerated by our ability to scale innovation at a faster pace and expand new digital consumer experiences around the world.”*

Diluted earnings per share for the quarter was 68 cents, exceeding Wall Street’s consensus estimate of 65 cents. The earnings gain was driven by strong revenue growth and gross margin expansion, partially offset by higher selling and administrative expenses. In the prior year period, diluted loss per share reflected the enactment of the U.S. Tax Cuts and Jobs Act which has impacted comparability with the current period.

“The Consumer Direct Offense is delivering broad-based growth across all four of our geographies, led by continued momentum in China,” said Andy Campion, executive vice president and chief financial officer, Nike Inc. “We will continue investing in key capabilities to drive Nike’s digital transformation and fuel strong profitable growth into next fiscal year and

Third Quarter Income Statement Review

  • Revenues for Nike, Inc. increased 7 percent to $9.6 billion, up 11 percent on a currency-neutral basis.
  • Revenues for the Nike Brand were $9.1 billion, up 12 percent on a currency-neutral basis driven by growth across wholesale and Nike Direct, categories including Sportswear and Jordan, and continued double-digit growth across footwear and apparel.
  • Revenues for Converse were $463 million, down 2 percent on a currency-neutral basis, mainly driven by double-digit growth in Asia and digital which was more than offset by declines in the U.S. and Europe.
  • Gross margin increased 130 basis points to 45.1 percent primarily driven by higher average selling prices, favorable changes in foreign currency exchange rates and growth in Nike Direct, partially offset by higher product costs.
  • Selling and administrative expense increased 12 percent to $3.1 billion. Demand creation expense was $865 million, flat to the prior year. Operating overhead expense increased 17 percent to $2.2 billion driven primarily by wage-related expenses, which reflect critical investments to drive key transformational initiatives for the Consumer Direct Offense.
  • The effective tax rate was 14.7 percent, compared to 179.5 percent for the same period last year which included one-time charges related to the enactment of the U.S. Tax Cuts and Jobs Act.
  • Net income was $1.1 billion in the third quarter and diluted earnings per share were 68 cents driven by strong revenue growth, gross margin expansion, the lower effective tax rate, and a lower average share count, which were slightly offset by higher selling and administrative expenses. The company showed a net loss of $921 million, or 57 cents a share in the year-ago period due to charges related to tax reform.

By region, sales in North America for Nike Brand improved 6.9 percent to $11.7 billion and rose 7 percent on a currency-neutral basis.  EBIT expanded 9.6 percent to $2.88 billion.

In the EMEA region, revenues for Nike Brand rose 8.5 percent to $7.36 billion and increased 12 percent on a currency-neutral basis. EBIT rose 23.5 percent to $1.49 billion.

Greater China’s revenues for Nike Brand were up 23.0 percent to $4.51 billion and advanced 25 percent on a currency-neutral basis. EBIT grew 34.2 percent to $1.7 billion.

In the APLA (Asia Pacific & Latin America) region, revenues for Nike Brand grew 3.9 percent to $3.88 billion and added 14 percent currency-neutral. EBIT increased 15.8 percent to $983 million.

By product category, footwear revenues for Nike Brand led the way, up 9.9 percent to $17.7 million and ahead 13 percent on a currency-neutral basis. Apparel sales were up 9.2 percent to $8.71 billion and added 12 percent currency-neutral. Equipment sales dipped 0.9 percent to $1.05 billion while adding 2 percent currency-neutral.

February 28, 2019 Balance Sheet Review

  • Inventories for Nike, Inc. were $5.4 billion, up 1 percent compared to the prior year period,
    primarily driven by strong demand for key franchises resulting in healthy inventories across
    all geographies.
  • Cash and equivalents and short-term investments were $4.0 billion, $705 million lower
    then last year as share repurchases, dividends, and investments in infrastructure more than
    offset proceeds from net income.

Share Repurchases

  • During the third quarter, Nike, Inc. repurchased 9.8 million shares for a total of $754 million.
  • During the quarter, the company completed the four-year, $12 billion programs authorized by the
    Board of Directors in November 2015 and commenced a new four-year, $15 billion share
    repurchase program which was authorized in June 2018.