Nike’s First Quarter; Strong. The Integration of Brand and Retail is Particularly Interesting

Normally, I prefer to wait for the actual quarterly filing to be available before doing this kind of analysis, but I trust you can all appreciate what a monumental waste of time it would be to really dig into Nike’s balance sheet. They’ve got $4.7 billion in cash and short term investments and $9.7 billion in shareholders’ equity. They got only $342 million in long term debt and no outstanding bank borrowings. So my analysis? It’s strong. It’s a monster. They can do anything they want. Let’s move on.

Reported revenue for the quarter ended August 31 was up 8% to $5.175 billion compared to the same quarter last year. Gross profit was up 10% to $2.434 billion with the gross profit margin rising from 46.2% to 47.0%. This increase was the result of “…growth and improved profitability from Direct to Consumer operations, fewer and more profitable close-out sales and improved in-line product margins. These factors more than offset margin pressures resulting from changes in foreign currency and higher air freight costs to meet strong demand for NIKE Brand products.”

They note in the conference call that they were surprised by the strength of their gross margins because some cost increases were hitting later than expected. They see labor, oil, and cotton becoming more expensive. They also note that there was a delay in price increases because they negotiate prices with factories several seasons out. In the long term, they believe they can continue to expand margins.
 
Some of those statements seem worthy of some more discussion. If anticipated cost increases are down the road how, exactly, will they increase gross margins? Maybe it depends what you mean by “long term.” They indicated they might have some pricing power with certain products and maybe that’s where higher margins could come from.
 
We all have marketing or advertising and promotion expenses, but Nike has “Demand creation expense,” which I think is a much more descriptive phrase. It went up 23% to $679 million. They point to a couple of major events as being responsible for much of that increase. Their “Operating overhead expense” (what you and I might call general and administrative expense) was essentially flat at $994 million. Net income was up nine percent to $559 million.
 
Hurley, which we’d all like lots of details on but don’t get, is part of Nike’s “Other Businesses” segment. In addition to Hurley, the segment includes Cole Hann, Converse, NIKE golf and Umbro. That segment generated revenues of $693 in the quarter. Hurley revenues were up double digit, but that’s the only specific we get, and it’s not all that specific.
 
North American Revenues, at $1.903 billion, were up 8% as reported. Western Europe, at $1.056 billion, was down 4%. Central and Eastern Europe, at $263 million, was up 3%. Greater China was up 11% to $460 million but Japan fell 12% to $163 million. Emerging Markets at $591 million grew 30%.
 
For the Nike brand, footwear grew 7% to $2.798 billion and represented 54% of total quarterly revenues. Apparel, up 7% as well, was $1.362 billion or 26% of total revenues for the quarter. Equipment was $276 million, down 5% and representing 5%.
Retail sales were a record for the quarter, with comparative store sales up 13%. Digital sales grew by 22%. 
 
The immediate future looks pretty good. Worldwide future orders for Nike brand apparel and footwear “…scheduled for delivery from September 2010 through January 2010, totaled $7.1 billion, 10 percent higher than orders reported for the same period last year.” They don’t offer any numbers for equipment or the other “other” segment that includes Hurley.
 
Strategically, their discussion of flexibility, balance and alignment as the three reasons for outstanding performance was really interesting. I know it kind of sounds like a platitude, but it’s not. I could write a whole bunch on what they mean, but I couldn’t say it much better than they did. The conference call transcript is here. http://seekingalpha.com/article/226811-nike-ceo-discusses-f1q2011-results-earnings-call-transcript. I strongly suggest you read through their prepared comments in the early part of the transcript to understand what they mean. As part of it, they talk about the integration of retail and brands and how they are “… learning how to integrate and leverage the brands more than ever before.” They specifically refer to how they combined the Nike, Hurley and Converse brands at the U.S. Open in Huntington Beach. Many of you no doubt saw that.
 
This isn’t just about Nike. Multiple brands with a retail and online component seems to be the strategy most larger companies are pursuing. I’d go so far to say you won’t be able to become a larger brand unless you pursue that strategy, so you need to pay attention to it. It not only offers competitive advantages, but really lets a company leverage its back end. Look at Billabong or Quiksilver. Watch as retailer Zumiez works to make itself a brand.
 
You can learn a lot from Nike’s strategy.      

 

 

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