Nike's Upward Swoosh
By Stanley Holmes
Nike just elevated its game in the global sports arena. The Beaverton (Ore.) sneaker and apparel giant scored the kind of financial results that could easily be called a slam dunk. Consider: For fiscal 2004, Nike's (NKE ) full-year revenues surged 15%, to $12.3 billion. Full-year net earnings jumped 27%, to $945.6 million, or $3.51 per share before last year's accounting change. It achieved the highest gross margin in its history, at 42.9%, and worldwide future orders climbed to 10.7%. Observes Nike founder, Chairman, and CEO Philip H. Knight: "It was a great year for the Nike brand."
The gains reflect several key trends. Nike has sharpened its edge in design and marketing of sports shoes and apparel, it has steadily expanded into overseas markets, it has instilled new financial discipline and improved inventory control, and it has ridden the wave of a growing U.S. economy. Finally, Nike has settled its differences with its largest U.S. retailer -- Footlocker (FL ) -- and that'll also boost future sales.
Nike reported global future orders for athletic footwear and apparel totaling $5.5 billion, or 10.7% higher than last year. These orders are scheduled for delivery from June to November, 2004. U.S. orders led the way, increasing 10% after eight nearly stagnant quarters. Europe grew 9%. Asia Pacific jumped 21%. And the Americas region increased 4%. Favorable currency rate fluctuations make the numbers -- especially in Europe -- appear a bit brighter than they really are. Nonetheless, the robust bookings suggest that Nike's business looks even stronger for fiscal 2005.
All of these factors make Wall Street investors salivate. Nike's stock price jumped 27% during the past 12 months, and many analysts are betting it will rise even more over the next fiscal year. It closed on June 24 at $72.40, up 11 cents. But in after-hours trading, shares have climbed $1.87, to $74.27, or nearly 3%.
For its fiscal fourth quarter ended May 31, Nike's net earnings grew 24%, to $305 million, or $1.13 per share, up from 92 cents, or $246.2 million, a year earlier. The numbers beat Wall Street estimates. Revenue rose 17%, to $3.5 billion in the quarter. The strongest gains for the quarter came from Europe, where sales surpassed $1 billion and were up 16% from the previous year. About 14 percentage points came from favorable exchange rates. Sales in Asia Pacific and the Americas markets also saw strong percentage gains, but from smaller bases.
Nike's numbers fundamentally are being driven by strong footwear sales. Product lines such as Air Force 1, Jordan retro shoes, and Shox are selling briskly with $99 and $135 versions, analysts say. Nike is also getting strong future bookings for its new Impact shoe, which hits retailers in July and looks like a more stylish Shox. Nike Co-President Mark Parker told a conference call of analysts and reporters that Shox continues to "excite" consumers.
"One major retailer has informed us they sold their entire inventory of $125 Nike Shox footwear at full price," Parker said. "Clearly, there appears to be a healthy appetite for performance products."
A resurgent U.S. economy is putting money back into the hands of young consumers who are beginning to buy more pricey sneakers. And Nike also is doing a better job of designing more fashionable-looking sneakers for specific market channels, from high-end athletic to family footwear. "This has really helped them to improve revenues, market share, and operating profit," says John Shanley, analyst for Susquehanna Financial Group. "It's broadened the reach of the brand."
Less flashy, but equally crucial to Nike's bottom line has been a costly overhaul of its global supply chain. In fiscal 2003, Nike's gross margin reached 41%, the highest in a decade, before moving to its highest level ever in 2004. CFO Don Blair acknowledged the benefit of favorable currency rates but noted that "the balance was the result of better margins on both in-line and closeout product." That was "driven by cost initiatives and tighter supply chain," he added.
Nike can count on its renewed relationship with Foot Locker to boost sneaker sales in fiscal 2005. The two companies had been at odds over whether consumers would continue to purchase high-end sneakers. Foot Locker cut its Nike orders by between $150 million to $250 million in 2002, and Nike responded by slashing its planned 2003 shipments by $400 million, or 40% of what it had shipped the previous year.
The estrangement hurt Foot Locker -- the nation's No. 1 sneaker retailer -- more than it did Nike. Even so, the feud didn't help either company or the athletic shoe industry. "Nike has learned from its mistakes," says Susquehanna's Shanley, "and their renewed relationship with Foot Locker will boost U.S. orders." For now, Nike just keeps running away from the competition.
Holmes is a correspondent in BusinessWeek's Seattle bureau
Edited by Douglas Harbrecht
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