Nike Earnings: High Growth in North America and Europe Drives Nike's 13% Revenue Growth
- Nike recorded 13% annual revenue growth in Q3 2014, with a 30 basis points y-o-y expansion in gross margins.
- Strong growth in North America and Europe helped the company achieve this performance. Chinese sales saw 7% growth during the fourth quarter as compared to 5% the previous quarter.
- Revenue for Nike Brands from the DTC channel grew 23% driven by 10% comparable store growth and an impressive 57% growth in online sales.
Sports giant Nike ( NKE ) recorded another strong quarter in Q3 2014, with revenue rising by 13% annually to $7 billion. Gross margin expanded by 30 basis points y-o-y, helped by higher selling prices and continued growth in the higher margin direct-to-consumer (DTC) business, which were partially offset by an increase in input costs, higher discounts and currency headwinds. The company's strong performance in Q3 2014 was underscored by high growth in North America and Europe. High demand in running, basketball and football categories continue to fuel the growth momentum for Nike. Chinese sales showed more signs of a turnaround as the company's revenues from the region grew by 7% in Q3 2014. The company's outlook on this market in 2014 continues to be optimistic.
Nike forecasts revenue growth in the high single digits in the fourth quarter of 2014, with 25 basis points improvement in gross margin. We believe the company's gross margin improvement could be higher than estimated in fiscal year 2014, if it is able to leverage its DTC business to grow sales in Brazil during the FIFA World Cup and if currency headwinds soften over the year.
Running, basketball and football represent the key growth categories for Nike
Running, basketball and football are the key categories that are helping Nike maintain its strong growth momentum. Innovative technologies such as Nike Air, Lunar, Flyknit, Free and Dri-Fit are fueling growth in the running category. The basketball category is being driven by partnership with leading basketball players and participation in major tournaments across the world. We expect the growth in the football category to accelerate in the future due to major sporting events, such as the 2014 FIFA World Cup.
Update on Chinese results
In line with our expectations, Chinese results improved in Q3 2014. Nike brand revenues in Greater China saw 7% growth (in constant currency terms) in Q3 as compared to a 5% currency-neutral growth in the previous quarter. Nike is aggressively taking steps to return to growth in this region by reducing its inventory, enhancing its marketing activities, creating differentiated product portfolio and improving the productivity of its store base in China. While these efforts are bringing in progress, the company's management indicated that it is still in the process to achieve sustainable growth in the region.
However, the futures order growth from Greater China at the end of February declined by 3% (in constant currency terms) as compared to the prior year. Nike's management expects revenue from this region in Q4 of fiscal 2014 to be lower as compared to the previous year, as it continues to manage the inventory in the marketplace. Nike expects a recovery to continue in Greater China in the final quarter of fiscal year 2014, with revenues stabilizing around prior year levels. Given that sales grew by 7% in comparison to a reported future orders growth of 4% over the previous quarter, we believe these estimates to continue and expect sales to be flat over the next quarter.
Europe Continues To Surprise
Nike brand revenues in Western Europe grew by 19% (in constant currency terms) in Q3 2014, further confirming that Nike is gaining ground on market leader Adidas. Strong growth was seen in the U.K., Austria, Germany and Switzerland, and revenues from each region were up by double digits. Futures orders growth from this geography was up 30% at the end of February 2014. The strong results reflect the success of the restructuring process Nike undertook two years ago. This involved improving coordination with wholesale partners to better segment and differentiate the market, the launch of its own DTC locations and collaboration with key retail partners such as JD Sports and Foot Locker to improve customer experience.
Nike brand revenues in Central and Eastern Europe saw 17% annual revenue growth in Q3 fueled by high demand in Russia, Poland, Greece and Turkey. We expect high growth in this market over Q4 2014 due to growing economic prosperity in the region. Recent futures order growth at 13% (in constant currency terms) supports our outlook. Nike's management revealed that they do not expect the economic and political uncertainty in Russia to affect their business in the region. Russia comprises only 25% of the total Central and Eastern Europe business, and a drop in sales in Russia should be manageable across the portfolio.
Outlook for Q4 fiscal year 2014
- Revenue to rise at a high single-digit rate.
- Q4 gross margin to be 25 basis points higher than previous year due to a shift in mix to higher margin products and geographies as well as ongoing strength in the higher margin DTC business.
- SG&A expenses will increase at a high teen rate on account of higher marketing expenses related to the FIFA World Cup.
We are in the process of revising our $68 price estimate for Nike's stock.