Nike Inc. (NYSE: NKE) released stronger-than-expected fiscal second-quarter 2017 results Tuesday after the market closed, and shares of the athletic footwear and apparel behemoth are up a modest 2% in after-hours trading as of this writing. Let's take a closer look at what drove Nike's results over the past three months.
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IMAGE SOURCE: NIKE, INC.
Nike results: The raw numbers
DATA SOURCE: NIKE INC.
What happened with Nike this quarter?
- Had it not been for the negative effects of foreign currency exchange, revenue would have climbed 8%.
- For perspective, Nike's guidance provided in Septembercalled for quarterly revenue to increase in the mid-single-digit percent range, or more specifically at or slightly below its reported futures growth at the time of 5% (7% at constant currency).
- Revenue growth was driven by strong global consumer demand, including an 8% constant-currency increase in Nike brand revenue, to $7.7 billion.
- Within that Nike brand total, on a geographic basis:
- North American revenue grew 3% year over year, to $3.65 billion.
- Revenue in Western Europe climbed 7% year over year (12% excluding currencies), to $1.385 billion.
- Revenue in Central and Eastern Europe rose 1% year over year (with a negligible currencies impact), to $328 million.
- Revenue in Greater China grew 12% year over year (17% excluding currencies), to $1.055 billion.
- Revenue in Japan increased 16% year over year (but fell 2% excluding currencies), to $238 million.
- Emerging markets revenue grew 6% year over year (13% excluding currencies), to $1.047 billion.
- By Nike brand product segment:
- Footwear revenue grew 5% year over year (7% at constant currency), to $4.82 billion.
- Apparel revenue increased 7% year over year (9% at constant currency), to $2.54 billion.
- Equipment revenue rose only slightly year over year (up 2% at constant currency), to $346 million.
- Global brand divisions revenue, which consists primarily of Nike brand licensing, grew 17%, to $21 million.
- Converse brand revenue grew 5% year over year, to $416 million.
- On the bottom line, Nike bolstered per-share earnings by repurchasing 17 million shares for roughly $900 million during the quarter, as part of its ambitious four-year, $12 billion buyback authorized in November 2015. As of the end of this November, Nike had repurchased 56 million shares for $3.1 billion under that program.
- Gross margin fell 140 basis points year over year, to 44.2%, driven by higher product costs, currency headwinds, and higher off-price sales as Nike works to rebalance its supply.
- Inventories climbed 9% year over year, to $5 billion at the quarter's end, driven by a combination of a 1% increase in Nike brand wholesale unit inventories, higher average product costs from product mix, and inventory increases related to growth in Nike's direct-to-consumer business.
- The quarter ended with $5.9 billion in cash and investments, down $173 million year over year as net income growth and debt issuance proceeds were offset by share repurchases, dividend increases, infrastructure investments, and lower collateral received from counterparties under Nike's currency hedging program.
What management had to say
CEO Mark Parker stated:
Last quarter, Nike CFO Andy Campion noted that while futures are "still an important aspect of [Nike's] business model," they're also increasingly less correlated with the company's actual reported revenue growth. For this disparity, investors can thank a combination of of higher direct-to-consumer revenue, which is reported based on the full retail price to consumers (in contrast to futures, which are reported on a wholesale basis), as well as the fact that other growing revenue sources are not includedin futures orders, including Converse, Nike Factory Stores, and the At Once business.
With that in mind, during the subsequent conference call, management revealed that currency-neutral futures orders grew 2% year over year, including a 1% increase in units and a 1% contribution from higher average selling prices. Futures as reported are flat on a year-over-year basis.
Meanwhile, Nike continues to anticipate revenue growth for the full fiscal year to be in the high-single-digit to low-double-digit range, including mid-single-digit reported revenue growth for the (current) fiscal third quarter. Also in the second half of the fiscal year, Nike expects North American revenue to continue to outpace futures and return to gross margin expansion.
That's not to say Nike's results this quarter were completely awe-inspiring. But they were undeniably solid if anything else and included very little for long-term investors not to like. In the end, Nike is as strong as ever, and I think shareholders should be more than pleased with its position today.
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