Friday, 27 September 2013

So how is Nike able to succeed in a challenging global economy?

25 years ago NIKE launched its first ‘Just Do It’. These are three simple words that remain a rallying cry for people striving to reach their full potential.

Looking at Q1 results, Nike is off to a great start. First quarter revenues were up 8%, gross margins grew 120 basis points better than projected and diluted earnings per share increased 37% to $0.86.

So how is Nike able to succeed in a challenging global economy?

By focusing on the fundamentals, the competitive advantages that help Nike win and expand their leadership position. Mark Parker, President and CEO provided with three highlights; ability to innovate, the power of the NIKE Inc portfolio and ability to continue to make meaningful connections with consumers.

So let's take a look at the first one, ability to innovate. It's what fuels Nike’s growth and it always starts with the athletes. How can Nike make the athlete faster, stronger, better and help them push themselves to new levels of performance.

In Q1 Nike launched a whole array of products that deliver the promise including the NIKE Free Flyknit, the next generation of Flyknit products in a running category. This shoe demonstrates how Nike takes Flyknit and combines it with other footwear platform like Free in this case to continue to integrate and serve the athletes. As you may have heard before, Flyknit is high performance, visually iconic and manufactured in ways that reduce labor and waste.

First quarter revenue for Nike Inc. increased 8% on both a reported and currency neutral basis as revenue for the NIKE brand including NIKE Golf and Hurley increased 7% and Converse increased 16%.

NIKE brand future orders accelerated to 10% growth on a currency neutral basis reflecting a 7% increase in units and a 3% increase in average selling price. The increase was led by double-digit growth in North America and both European geographies. Weaker foreign currencies reduced reported futures growth to 8%. First quarter diluted EPS increased 37% to $0.86 driven by revenue growth, gross margin expansion and leverage of SG&A expenses which were flat for the quarter.

In North America Q1 revenue increased 9% on both a reported and a constant currency basis, driven by growth across all key categories except Golf, including double-digit growth in Basketball, running and men's training. For the quarter footwear revenue increased 9%, while apparel and equipment grew 9% and 13% respectively.

Q2 Guidance:

For the second quarter, Nike expects to see gross margin expansion of about 50 basis points driven by continued benefits from higher average prices, easing raw material costs and growth in DTC partially offset by higher discounts to clear inventories in Mexico, start-up costs for expanded U.S. distribution center and stiffening FX headwinds .

For the fiscal year, they also expect gross margin expansion of approximately 50 basis points, a modest increase from prior guidance as the ongoing impact of the upside that drove Q1 results are expected to more than offset FX headwinds and labor cost inflation. For Q2, Nike expects SG&A to grow at a mid-teens rate reflecting shifts in demand creation, phasing and ongoing investments in strategic initiatives. The management indicated last quarter that there will be more volatility in the year-over-year comparisons of SG&A due the timing of key sporting events this year and last.

For the full year, Nike continues to expect SG&A to grow at a low double-digit rate as they invest in their brands, DTC and innovation. For FY '14, they continue to expect the effective tax rate will be about 25%. Q1 was a great start for fiscal 2014 delivering strong growth in revenue and profitability. Over the balance of the year, management expects to continue to drive revenue growth and gross margin expansion while making the investment and demand creation and innovation that will deliver sustainable profitable growth and consistent value to their shareholders in the future.

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