Nike faces headwinds in North America
Nike offered a mixed bag of results for the first quarter on Tuesday, with profits down slightly on challenged sales in North America, although the athletics apparel maker edged past many analysts’ expectations. Quarter one revenues were $9.07 billion, flat to prior year on both a reported and currency-neutral basis, according to a company press release, in line with FactSet analyst expectations cited by MarketWatch.
By brand, Nike brand revenue rose 2% to $8.6 billion on a currency-neutral basis, driven by growth in Greater China, Europe, the Middle East and Africa, as well as the Asia Pacific region, including growth in sportswear, the company said. Converse revenue fell 16% on a currency-neutral basis, mainly driven by declines in North America, according to Nike’s press release.
Gross margin in the quarter declined 180 basis points to 43.7%, due primarily to unfavorable changes in foreign currency exchange rates and, to a lesser extent, a higher mix of off-price sales, the company said. Inventories for Nike, Inc. were $5.2 billion, up 6% from the year-ago quarter, driven by a higher average cost per unit, primarily due to product mix and, to a lesser extent, changes in foreign currency exchange rates and growth in direct-to-consumer sales.
Nike is in the midst of a change of focus, balancing performance apparel and footwear with consumers’ desire for street style and growth abroad with challenges in North America.
"The good news from a backdrop standpoint is that consumers I think are really increasingly passionate about leading an active healthy lifestyle, and that’s obvious in North America," CEO Mark Parker told analysts Tuesday, according to a transcript from Seeking Alpha. "There’s always that shift that takes place back and forth naturally between sportswear and the performance side of the business. And we’re seeing a real symbiotic relationship between those two sides and trying to take advantage of that as best we can."
In a challenge to its partner retailers, Nike is shifting to an emphasis on selling directly to consumers, particularly in North America, including in its own stores and website, and on global marketplaces. Notably, the brand announced in June it would begin selling on Amazon through its brand-registry program — a move that was lauded by some analysts as smart for Nike, but bad for its retail partners.
Executives on Tuesday gave little indication about Nike's experience on Amazon, saying the pilot is still in its early stages and that they would have more to report at the company’s investors meeting next month at its headquarters in Beaverton, OR.
Growth in China continues to be a boon for the brand. Nike brand president Trevor Edwards noted the 500 million daily users on Alibaba’s Tmall, where, he said, Nike is the number one sports brand. A new Tmall Nike Jordan door opened a few months ago, and drove more than 2 million shoppers in the first 10 days, he said. "Our success in China also offers a reminder that no matter what may be happening in the United States retail, Nike is positioned for continued sustainable growth," he said.
While the headwinds in North America continue to challenge Nike, Moody’s Investors Service suggested the focus overseas and on direct selling will buoy the company. "As expected, the North American wholesale sales slowdown, currency pressure and higher mix of off-price sales took a toll on Nike's first quarter results …. We expect challenges to remain in North America for at least several more quarters," Moody's Assistant Vice President Mike Zuccaro said in an email to Retail Dive. "However, Nike continues to see sustained growth in international markets, now over 55% of sales, as well as its Nike direct channel, which grew 11% year-over-year driven by online growth of 19%, new store openings and comparable store sales growth of 5%."
- press release via BusinessWire NIKE, Inc. Reports Fiscal 2018 First Quarter Results
- Seeking Alpha Earnings Call Transcript NIKE's CEO Mark Parker on Q1 2018 Results
Follow Daphne Howland on Twitter