Nike scores 2nd straight quarter of growth in North America
Nike announced Tuesday that revenue increased 10% in the first quarter, rising to $9.9 billion. By brand, Nike brought in $9.4 billion, while revenues at the Converse brand reached $527 million. Gross margin for the quarter increased by 50 basis points and net income increased 15% to $1.1 billion, according to a company press release, which beat expectations cited by MarketWatch for $9.9 billion.
Revenue was driven by double-digit growth both internationally and in Nike Direct, "strong momentum in North America" and growth in "almost every category led by sportswear," according to the release. In North America in particular, where Nike has previously struggled, the company reported 6% growth, per a Seeking Alpha transcript.
Despite the earnings beat, Nike shares fell over 2% after the news, likely due to increased expenses in the quarter. Not only did selling and administrative expenses increase (by 7% to $3.1 billion), but demand creation expense likewise rose, by 13%, "primarily driven by sports marketing investments, brand campaigns and key sports moments," the company said. Operating overhead expense also increased 5% to $2.1 billion, driven by investments in the company's Consumer Direct Offense.
The quarter wasn't just about positive numbers. Nike executives also discussed the Nike Live store concept, which opened in the quarter and has been "incredibly successful," according to CEO Mark Parker.
"What we're learning in Melrose, we're bringing to two new flagship stores in our two most important key cities, New York and Shanghai this next quarter," Parker said on a conference call with analysts. "Both will be the combination of all we've learned about personalized and experiential shopping over the last several years. There will be incredible showcases for the Nike brand."
The expansion of the Nike Live concept, which focuses on experience and personalization in an exclusive, members-only format and also makes a push toward using mobile phones in store, shows that efforts to attract its most loyal shoppers in areas where they're most concentrated are paying off.
Growth in other areas was also encouraging for the brand, with apparel increasing by 11%, though executives noted that footwear was "not yet where we want to be." With the popularity of sneakers, especially in the athleisure movement, it makes sense that the retailer has labeled footwear innovation as a priority going forward. The big story from Nike's earnings was the return to growth in North America, though.
"One of the key developments for [Nike] over the past six months has been the rapid recovery in the domestic business … which represents a far faster recovery to the long-term target of mid-single-digit growth than we expected," Wells Fargo analysts wrote. Notably, the growth was driven in a high-quality manner, as the only channel that didn't perform well was the outlet business — partially because the sell-throughs at full-price were so strong (leaving less merchandise to be cleared via outlets)."
All-in-all, the quarter seemed to assert Nike's strong position against players like Under Armour, which has struggled recently, and Adidas, which has proven itself a key challenger to the Nike brand.
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