Crediting the efforts being made to execute its Consumer Direct Offense program, Nike reported better-than-expected results for the second quarter ended on Nov. 30. Revenues grew by 14 percent on a currency-neutral basis across the group, with increases of 14 percent for the Nike brand and 6 percent for Converse.
On a reported basis, revenues rose by 10 percent to $9,374 million, compared with the $9,170 million level that financial analysts had projected. Net income also rose by 10 percent, reaching $847 million, but diluted earnings per share went up by 13 percent to 52 cents, six cents higher than what analysts had expected.
Much of the growth was attributed to a currency-neutral 41 percent jump in digital sales, with mobile devices accounting for more than 50 percent of the online turnover. While growing less fast overall, Adidas had reported an even higher 76 percent increase in its own online sales in the latest quarter.
In commenting on its own quarterly results yesterday, Nike's management said that its digital momentum is now prompting it to predict that in the longer term more than half of the company's sales will go over the internet. It noted that consumers have positively responded to the digital disruption that is occurring in the retailing of other products such as toys, electronics and books.
Nike had most recently given a target of 30 percent digital penetration by 2023, compared with the present level of 15 percent, but the management says that this will likely be only “a milestone” on its roadmap. Nike is getting strong traction from various new initiatives on this front, such as the roll-out of country-specific shopping apps, like the one recently introduced in Japan, and the integration of new features in existing apps.
Insisting on the disruptive power of “consumer-centric digital experiences,” the management also mentioned the strong response that it is getting to the innovative physical and digital features that it is offering at its recently opened flagship stores in Los Angeles, New York and Shanghai, which will be followed by one in Tokyo in the third quarter. It added that the “connected inventory” that it has introduced in South Korea is driving thousands of consumers to purchase Nike products, including those that they cannot find in the local brick-and-mortar stores.
Aside from the strong growth of direct-to-consumer sales in all parts of the world, the management mentioned the resumption of the Nike brand's growth in wholesale revenues in North America, after two quarters of declines. The regained growth was partly attributed to “elevating the shopping experience” with key clients in the U.S. like Foot Locker, Dick's Sporting Goods and now also JD Sports Fashion.
The company's digital transformation and a higher proportion of sales at full price were credited for a higher-than-expected increase of 0.8 percentage points in the quarterly gross margin to 43.8 percent. They partially offset higher product costs. Neither the management nor the financial analysts addressed the issue of the higher import tariffs imposed by the U.S. government on imports from China, yet the management predicted that the gross margin will show an increase of 0.7 percentage points for the second half of the year and the full year, as in the first half. The gross margin had been lower in the first quarter.
Besides the group's strong digital focus, two other drivers of sales growth in the quarter were its focus on women's products and higher sales of apparel than before. Nike still has a lot of potential for further development in both areas as well as the release of more-affordable items.
Sales of women's products outpaced those of men's items in all the geographies in the latest quarter, representing about 25 percent of the total turnover more or less everywhere. The management said that Nike is “speaking more directly and more personally to women” with more specific sneakers and new capsule apparel collections.
On a global basis, the sportswear segment was the fastest-growing category in the quarter. Footwear and apparel both grew at a double-digit rate. Nike's Jordan brand resumed its growth in the U.S., but it grew faster internationally.
The management claimed that Nike was gaining “significant” market share in Europe, the Middle East and Africa (EMEA), where its sales went up by 14 percent on a currency-neutral basis during the quarter, with online sales going up by over 40 percent. In reported dollars, EMEA revenues increased by 8 percent to $2.31 billion.
The biggest gains were recorded in sportswear, running, training and the Jordan brand. Sales grew on a comparable store basis in Nike's stores in EMEA. Inventories were healthy and the momentum is expected to continue in the region, the management said, claiming that Nike has been rated the “coolest” sports brand in five key cities including London and Paris, where it is offering more “personalized” experiences to customers.
Another standout was a 31 percent increase in Greater China, here again driven by 40 percent digital growth. SNKRS membership is already higher there than in North America, and Nike is cooperating with the Chinese government to promote greater sports participation in various ways. In dollars, the regional turnover went up by 26 percent to $1.54 billion.
A higher increase of more than 75 percent was registered in the digital turnover in the Asia Pacific & Latin America region, where total revenues went up by 15 percent in local currencies. In reported terms, sales rose by only 2 percent to $1.29 billion, however.
Improving its performance in its main region, Nike raised its sales in North America by 9 percent in the quarter, reaching a level of $3.78 billion, with digital sales rising by more than 30 percent. Apparel increased by 10 percent in the region, but footwear grew faster than apparel in the other regions.
Operating earnings grew by 13 percent to $884 million in North America, by 34 percent to $450 million in EMEA, by 48 percent to $561 million in Greater China and by 10 percent to $321 million in APLA. Together this led to an increase of 17 percent for the Nike brand to $1,390 million.
Globally, new products have been responsible for 80 percent of the total growth in the first half of this year, and the management indicated that the company has a full pipeline of novelties in store for the Olympic Games in Tokyo. The supply chain's speed to market has improved.
Converse is struggling in the U.S. and the U.K., but it's doing well there on the digital front, and the brand is planning the launch of a new digital platform. In reported terms, the brand posted a 4 percent sales increase to $425 million in the quarter, and it operating profit declined by 8 percent to $44 million.
The good overall results of the second quarter have prompted the management to upgrade its sales forecast for the full financial year, predicting a high single-digit or low double-digit increase in local currencies. The reported growth will be about three points lower.
The stock exchange reacted by boosting Nike's share price by 7 percent in after-hours trading, peaking at some point 10 percent higher. The share price went up by 6 percent at Foot Locker, which buys more than 60 percent of its merchandise from the Swoosh.
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