24 Sep Nike’s Q1 Earnings Blow Past Estimates
Nike Inc. reported sales were down 1 percent in the first quarter ended August 31 but topped Wall Street’s targets as digital growth grew 82 percent. Earnings were up 10 percent and far ahead of analyst estimates.
- First-quarter reported revenues were $10.6 billion, down 1 percent on a reported basis, and flat to the prior year on a currency-neutral basis. Wall Street’s consensus estimate was $9.11 billion;
- Nike Direct sales were $3.7 billion, up 12 percent on a reported basis, and up 13 percent on a currency-neutral basis, with growth across all geographies;
- Nike Brand digital sales increased 82 percent, or 83 percent on a currency-neutral basis, with double-digit increases across North America, Greater China and APLA, and triple-digit growth in EMEA;
- Diluted earnings per share for the quarter were 95 cents a share, up 10 percent. Wall Street’s consensus estimate was 46 cents; and
- Inventory rose 15 percent versus the prior year, but decreased 9 percent versus the prior quarter.
“Our results this quarter continue to demonstrate Nike’s full competitive advantage, as we strengthen our position in the midst of disruption,” said John Donahoe, President and CEO, Nike, Inc. “In this dynamic environment, no one can match our pace of launching innovative products and our Brand’s deep connection to consumers. These strengths, coupled with our digital acceleration, are unlocking Nike’s long-term market potential.”
Nike said its first-quarter revenue performance was impacted by strong Nike Brand digital growth of 82 percent, offset by lower revenue in its wholesale business and Nike-owned stores. Nearly all of the Nike-owned physical doors were open during the quarter across North America, EMEA and Greater China with approximately 90 percent of doors open in APLA. However, despite a majority of stores open in the quarter, Nike continued to experience year-over-year declines in physical retail traffic across the marketplace due to COVID-19 impacts and safety-related measures offset partially by higher conversion rates. EMEA returned to growth of 5 percent on a reported basis, led by triple-digit growth in digital. Greater China revenue increased by 6 percent on a reported basis and 8 percent on a currency-neutral basis, led by digital and Nike Factory Stores.
“Nike is recovering faster based on accelerating brand momentum and digital growth, as well as our relentless focus on normalizing marketplace supply and demand,” said Matt Friend, executive vice president and chief financial officer, Nike, Inc. “We continue to drive investment in capabilities that will fuel our consumer-led digital transformation, catalyzing long-term growth and profitability for Nike.”
First Quarter Income Statement Review
- Revenues for Nike, Inc. decreased 1 percent to $10.6 billion and flat to the prior year on a currency-neutral basis;
- Revenues for the Nike Brand were $10.0 billion, flat to the prior year on a currency-neutral basis driven by double-digit growth in Nike Direct, as well as growth in Sportswear and the Jordan Brand, offset by declines in its wholesale business;
- Revenues for Converse were $563 million, up 2 percent on a currency-neutral basis, mainly driven by strong demand in Europe and in digital, globally;
- Gross margin decreased 90 basis points to 44.8 percent primarily as a result of impacts from COVID-19, including higher promotions to reduce excess inventory across the marketplace and higher supply chain costs. These factors were offset slightly by favorable full price product margins and the reversal of certain prior quarter reserve accruals associated with purchase order cancellation costs due to higher than anticipated consumer demand;
- Selling and administrative expenses decreased 11 percent to $3.0 billion;
- Demand creation expense was $677 million, down 33 percent due primarily to lower marketing spend as live sporting events were predominately postponed or canceled, slightly offset by continued investments in digital marketing to support heightened digital demand.
- Operating overhead expenses decreased 1 percent to $2.3 billion as lower travel and related expenses were slightly offset by restructuring costs and continued investments in digital capabilities, both of which are associated with the Consumer Direct Acceleration, the next digitally empowered phase of our strategy;
- The effective tax rate was 11.5 percent compared to 12.4 percent for the same period last year, primarily due to benefits from stock-based compensation offset by a reserve for a discrete tax matter; and
- Net income was $1.5 billion, up 11 percent as lower selling and administrative expense more than offset lower gross margin and revenue and diluted earnings per share was $0.95, increasing 10 percent.
- Total Nike Brand sales were down 0.8 percent to $10.0 billion from 10.1 billion a year ago and were flat on a currency-neutral basis;
- Total Nike Brand EBIT (earnings before interest and taxes) grew 13.3 percent to $2.11 billion from $1.86 billion;
- By category for the Nike Brand, footwear sales were up 3.8 percent to $6.77 billion from $6.52 billion and increased 5 percent on a currency-neutral basis. Apparel was down 7.9 percent to $2.88 billion from $3.12 billion and declined 7 percent on a currency-neutral basis. Equipment revenue slumped 17.2 percent to $371 million from $448 million and declined 16 percent on a currency-neutral basis;
- In North America, sales for Nike Brand slid 1.6 percent to $4.225 billion from $4.293 billion and were off 1 percent on a currency-neutral basis. EBIT advanced 18.4 percent to $1.302 billion from $1.100 billion a year ago;
- In Europe, Middle East & Africa (EMEA), sales for Nike Brand increased 4.9 percent to $2.91 billion from $2.773 billion and were ahead 5 percent on a currency-neutral basis. EBIT was up 13.6 percent to $692 million from $609 million a year ago;
- Greater China sales for Nike Brand were up 6.0 percent to $1.78 billion from $1.68 billion and added 8 percent on a currency-neutral basis. EBIT gained 2.8 percent to $688 million from $669 million;
- Asia Pacific & Latin America (APLA) sales for Nike Brand were down 18.3 percent to $1.099 billion from $1.345 billion and fell 12 percent on a currency-neutral basis. EBIT was down 17.9 percent to $280 million from $341 million; and
- Converse sales were up 1.4 percent to $563 million from $555 million. EBIT was up 21.7 percent to $168 million from $138 million.
August 31, 2020 Balance Sheet Review
- Inventory for Nike, Inc. were $6.7 billion, up 15 percent compared to the prior-year period, and down 9 percent from the previous quarter as it continued to manage excess inventory resulting from a significant number of door closures and lower wholesale shipments globally during the fourth quarter of fiscal year 2020; and
- Cash and equivalents and short-term investments were $9.5 billion, $5.8 billion higher than last year, primarily due to proceeds from a corporate bond issuance in March and positive free cash flow partially offset by share repurchases and cash dividends. Total liquidity at August 31 was $13.4 billion which includes cash and equivalents and short-term investments as well as committed credit facilities that remain undrawn.
Nike has a strong track record of investing in fuel growth and consistently increasing returns to shareholders including 18 consecutive years of increasing dividend payouts. In the first quarter, the company paid dividends of $384 million to shareholders, up 11 percent from the prior year.
During the fourth quarter 2020, Nike, Inc. temporarily suspended share repurchase activity in March to maximize liquidity during the COVID-19 pandemic. Prior to the temporary suspension of the share repurchase program, a total of 45.2 million shares had been repurchased for approximately $4.0 billion, resulting in approximately $11.0 billion in remaining capacity under the 2018 share repurchase program.