NIKE's (NKE) CEO Mark Parker On Q1 2018 Results Earnings Call Transcript

As we continue to get bigger as a company, I am often asked how can Nike continue to grow? Well, first and foremost, there is absolutely no shortage of growth opportunities for Nike. This has never been clear to me as it is today. When I look within and across our five brands, six geographies and eight categories, I see tremendous untapped potential. And this includes areas where we can build on our current foundation such as apparel and women’s and converse as well as areas where we can extend our current leadership position such as running, basketball, and football.

The key to unlocking this potential is and always has been to focus on the consumer. Our relationship with the consumer is something we need to earn every day. Increasingly this relationship is one to one through the lens of their favorite sport. This is why our category offense is such a powerful advantage. The insights we draw from our deep consumer connections fuel our ability to create new products and services that excite and engage. We also know we need to remain nimble to meet the changing needs and expectations of those we serve globally. The world is becoming increasingly interconnected and consumers expect companies to be able to deliver the same level of innovation everywhere. And that means continuing to elevate and accelerate our level of innovation in products, in services, in our supply chain and in our digital ecosystem.

We also know that when we focus on the consumer, we deliver value for our shareholders. We do this by ensuring our growth is profitable. The strength and diversity of the Nike Inc. portfolio allows us to manage the levers in our business to drive profitability and invest for the future so we can continue to innovate to meet the expectations of our consumers. And that is what you saw in our fiscal ‘14 performance, across all the elements of our business. And that is the virtuous cycle that fuels our success.

Our unmatched ability to innovate is how we turn insights from athletes and consumers into amazing products and services that no one else can deliver. Throughout the past year, we used key events and sport moments to launch our most forward-thinking products. Together with KOBE in Los Angeles, we introduced the KOBE 9 Elite, the first basketball shoe to use our unique Flyknit technology. At the Sochi Winter Olympics we leveraged significant advances from across our categories to deliver high performance apparel, such as the lightweight hockey Game Jersey with Flywire and the Aeroloft Summit Jacket.

In New York at the Super Bowl, we launched the Vapor Carbon Elite Cleat, our first cleat to take advantage of the revolutionary potential of 3D printing. At the world’s premier track meet, the Prefontaine Classic in Eugene, Oregon Nike athletes set new U.S. records and world’s best times in our performance racing footwear. And throughout fiscal ‘14 we have built tremendous momentum for the business and the brand as we delivered an unprecedented level of innovation heading into the World Cup.

The combination of the world’s best players and teams, our most innovative performance products and new levels of consumer engagement through social media is truly extraordinary. It sets the new benchmark for Nike and the industry. There is a lot more to share with you on our execution at World Cup, but I will save that for Trevor to discuss.

The products we launched this year were the culmination of an intense period of creativity for us. But make no mistake, there is much more in the pipeline. In fact, this is the pace of innovation that you should expect from us. We know innovation is a long-term growth driver and that is why we have been so focused on extending our investments in this area. And we are seeing clear returns on these investments.

I recently completed a comprehensive look at the product development taking place in each of our categories. And as you know, I am someone who lives and breathes innovation and I have never so – seen so much potential. I can tell you that the scope and scale of the innovations we will be delivering for our consumers is truly incredible. Our drive to innovate extends beyond product into areas such as digital. Our consumers expect us to be digitally connected as they are, making digital one of my top priorities for the company.

Athletes are demanding more real time personalized feedback on their performance. They want easy access to products and services that will help them improve. And they want to be part of a community where they can share and compare information, find performance tips and motivate each other. We are building an integrated system of digital services that will provide seamless access to our products, a full array of services and the most advanced digital tools to measure, motivate and inspire. Delivered with the soul of sport, this will be the digital platform for lifetime consumer relationships. Our goal is to grow the Nike+ community from tens of millions to hundreds of millions of members.

An ongoing two-way dialogue with consumers is also a critical element of our digital ecosystem. It provides us insights that drive innovation, strengthens consumer connections to our brands, and provides a platform for consumers to interact with each other. Through our social media platforms, we leverage the power and passion of sport to deepen our relationship with our consumers. A perfect example of this is our Risk Everything campaign, which celebrates the energy and enthusiasm of global football. Two of the campaign’s videos, Winner Stays and The Last Game, have set new records for engagement with over 370 million digital views and growing.

And finally, in e-commerce, we have made significant investments in infrastructure, capabilities and geographic expansion to provide a better experience. We know that when consumers shop online, they want a seamless, premium experience and that’s our goal for Our efforts are paying off. Our online business grew over 40% in fiscal ‘14, with the growth rate accelerating every quarter throughout the year. When all three elements of our digital ecosystem come together, it’s a powerful strategy to drive growth and meet and exceed the expectations of our consumers around the world and its potential is enormous. It is changing how we conduct our business, tell our stories, and engage consumers. It’s a big part of our future and will only get bigger and better.

Fiscal ‘14 has been another strong year for us and we will take that momentum into fiscal ‘15. We have aligned our leadership and resources to fully leverage those opportunities with the greatest potential for growth. With our deep consumer connections and our obsessive drive to innovate, we will excite, inspire and no doubt, surprise. That’s what you should expect from Nike in fiscal ‘15 and beyond.

So, thanks and now here is Trevor to discuss the Nike Brand.

Trevor Edwards

Thanks Mark. The Nike Brand had a strong finish to a great year, one that confirms the tremendous confidence that we have in our long-term growth strategy. Looking at the results, on a constant currency basis, Nike Brand revenue grew 13% for the quarter. For the year, revenue was up 11% with growth across all key categories and geographies. Nike Brand DTC revenue was up 27% for the quarter, with 22% for the year, putting DTC revenue past the $5 billion dollar mark. Results for the year were driven by comp store growth of 10%, new store expansion and online sales growth of 42%. And finally, global futures are up 12%. As always, these results can be attributed to Nike’s unrivaled ability to understand the consumer, what they need and what inspires them. That knowledge drives us to identify the biggest growth opportunities and align our resources against them.

Let me highlight three areas of the business, where we have seen significant revenue expansion on a wholesale equivalent basis clearly demonstrating the power of our consumer focus. First, I will start with global football, which in fiscal year ‘14 grew 21% to $2.3 billion. And that doesn’t even include our football sportswear product. Now, I visited Brazil many times over the past 20 years. But having just returned from Rio, I have to say, I have never seen energy like that before. There is a tremendous passion for football across the country. At Nike, our connection with Brazil is powerful. We have been there for years and we will be there long after the World Cup ends.

The enthusiasm we see in Brazil coupled with our number one footwear market share around the world is living proof that our football business has never been stronger. And the power of the category offense continues to fuel growth in football, with superior executions against engaging consumer connections, innovative products and premium retail destinations.

We bring the game’s passion to footballers worldwide by creating meaningful connections with them through unique events and experiences. A great example of our series is our series of Phenomenal Houses, which combine product trials, athlete appearances, football tournaments in an immersive Nike experience. Over the last 10 weeks, the Phenom Houses in Rio, London and New York and many other cities hosted more than 50,000 fans and thousands more played in our Winner Stays football tournaments around the globe.

As Mark mentioned, we are incredibly proud of our successful Risk Everything campaign. For years, we have taken inspiration from the best footballers and as we always do, we share that inspiration in the stories we tell. That kind of engaging story-telling energizes current football fans and brings new fans in, growing the market today and into the future. We also delivered an incredible number of innovative football products this year which led up to the first match in Rio. With the most teams in the tournament, we launched 10 new team kits, achieving a new milestone in performance and sustainability.

We introduced four ground-breaking performance boots the Hypervenom, the Tiempo 5, the Magista and the Mercurial Superfly. Both the Magista and the Mercurial use our transformative Flyknit technology to take football boots to a whole new level. The player’s response of these boots has been tremendous. There are more players wearing Nike boots in the World Cup than all other brands combined and more than a third of them are playing in the distinctive and revolutionary Magista or Mercurial Flyknit boots. And finally, we are seeing great excitement at retail, as Nike football helped to drive great results in our stores, online and at football shops with our wholesale partners around the world. Our comprehensive offense on the pitch and in the marketplace drives our leadership as the world’s best football brand and positions us for growth in this category for years to come.

Next, I would like to talk about running, which is also driven by product innovation, consumer engagement and retail presentation. It’s that focus that powers us, growing revenue 10% for the year to $4.6 billion dollars. Our results were driven by key product innovations like Free Flyknit footwear, Dri-Fit Touch and Aeroloft apparel just to name a few and we are expanding the business by connecting with a new generation of runners. In Q4 alone, we engaged with over 85,000 runners through events and millions more via our Nike+ platform. That energy directly translates at retail worldwide, in our DTC locations and running destinations like Cross Town Running at JD Sports and the Nike Track Club at the Finish Line. The consistent achievement in the running category confirms the strength of our strategy, and points to the massive potential we see for running going forward.

And third, our women’s business continues to drive strong growth. For the year, the women’s revenue grew 12% to nearly $5 billion, moving us closer to our goal of $7 billion by fiscal year ‘17. Our women’s strategy is very clear to combine running, training and sportswear into compelling product assortments that women want to run, train, and live in. With key styles like the Legend Tights, the Nike Pro Bras, and the Sky Hi Dunks, are must haves for her.

Our goal to elevate women’s product distribution this year was a success, as we brought the energy of the Nike Training Club app to life at retail. We blended three vital components pinnacle product assortments, premium services, and great shopping experiences that clearly demonstrate that Nike understands this consumers’ needs. The 50 plus stores where we have executed these concepts have been outpacing comp store growth for the rest of the fleet. Our success in fiscal year ‘14 only hints at the enormous opportunity we see in the women’s business and we are completely focused on capturing it.

Now, let’s shift focus on to the few of our key geographies. North America had another great quarter and posted a record year. Revenues were up 10% for the quarter and the year helping North America surpass $12 billion in annual revenue. The geography also had its most profitable year ever, with reported EBIT expanding faster than reported revenue to reach $3 billion for the year. For the last decade, we have heard that our opportunities in North America are tapped out. But as we continue to demonstrate, nothing could be further from the truth.

So, how do we do it? We expand the market and at the same time we take market share by understanding the consumer better than anyone else. We extend our leadership on our perennial strengths like the basketball and running categories. This expertise also gives us insight to capitalize on the significant growth opportunities like in e-commerce and in our apparel, women’s and young athletes businesses, just to name a few. And as we have often discussed, our confidence in the category offense in North America gives us the roadmap to continue to unlock opportunities in this geography and around the world.

Now, let’s turn to the emerging markets, which delivered exceptional Q4 results with revenue up 25%. These results were very well-balanced, with double-digit growth in almost every territory and increased revenues in nearly every key category. The Q4 results in our emerging markets demonstrated that our brand and products resonate with consumers in every corner of the globe. It was a great way to end a year that had some challenges. As we have talked about previously, we had logistics issues in Mexico in the first half of the year. This, combined with increased macroeconomic headwinds across Latin America, slowed revenue growth for the geography in fiscal year ‘14. We are continuing to closely monitor retailer inventory and the flow of product into Mexico and across Latin America to ensure the marketplace and our brand stay healthy.

Now on to China, where we had one overarching goal for fiscal year ’14: reset the marketplace for growth. We have made great progress and we are on track to achieve our goal of returning this market to sustainable, double-digit revenue growth. In our DTC doors, we tested and deployed new merchandising concepts, which drove Q4 comp store sales up 22% with continued increases in profitability. We have also tightened our merchandise assortments for our wholesale partners and re-profiled hundreds of the Nike-only stores they operate. As a result, comp store sales and profitability for their overall fleets are up with the re-profiled stores significantly outperforming. And importantly, inventory levels in the marketplace are also down significantly. While we still have work to do in China, we are making great progress. And we remain confident that we have the right plan in place to achieve our true potential in this growth geography.

And finally, there is the outstanding results we are seeing in Western Europe. Q4 revenue grew 18%, a truly remarkable finish to an incredible year, as revenues in this important geography increased 14% to nearly $5 billion for the year with growth across all key categories and nearly every territory. The success we are seeing today in Western Europe stems from decisions we made more than two years ago to align our teams against the biggest growth opportunities through the category offense. We fueled growth in fiscal year ‘14 by transforming the marketplace, with shop-in-shops at JD Sports, Foot Locker, and Intersport, as well as our own retail stores and online. And we have only just gotten started. There are tremendous opportunities for continued growth ahead. By being focused and decisive, we now lead the market as the region’s most coveted sports brand. Nike is the number one brand in each of the top 10 cities in Western Europe and we are the footwear market share leader in every key country. And we are not done yet.

As we start a new fiscal year, we will continue to do what we do best, lead: lead with the world’s most innovative products and services, inspired by the greatest athletes; lead by connecting with consumers who share our passion for sport; and lead by energizing the marketplace with superior experiences at retail and online across the world. There is no doubt about it, the momentum surrounding Nike makes me incredibly excited about what’s to come.

Thanks. Now, here is Don.

Don Blair

Thanks, Trevor. Our FY ‘14 results continue to demonstrate our ability to leverage our diversified portfolio to drive sustainable, profitable growth. We are able to consistently deliver results like these for three key reasons. First, we invest effectively to build our business. The category offense is the framework for our growth strategy. And as Mark and Trevor described earlier, we are delivering outstanding value to consumers on each component of that framework: product, brand and marketplace. The results were clearly on display in FY ‘14. We continue to drive remarkable growth in North America and we have significantly accelerated our business in both of our European geographies.

Using the learnings gathered in more developed markets, we are making great progress resetting China, while continuing to build our brands and our business in the emerging markets. Within all of those geographies, our direct to consumer operations are the sharp point, delivering strong growth in revenue and profits, while setting a benchmark for our brand and our business in store and online. And beyond the Swoosh, we are continuing to build the Converse, Jordan and Hurley brands reaching toward the enormous potential they each offer. The results we are reporting today flow directly from the investments we have made over the past several years and we are confident the investments we are making today will continue to drive sustainable, profitable growth well into the future.

Second, we work hard to maintain balance across growth and profitability, investments and returns, near-term and long-term results. The breadth and depth of the Nike portfolio gives us the opportunity to invest for the future while delivering strong growth and expanding returns on capital. And that’s important for us to compete effectively and to continue to deliver value for our shareholders.

And the third reason we deliver consistent growth is that we effectively manage risk. In FY ‘14, we delivered 11% growth in EPS, despite losing 8 points of growth to currency headwinds. Our ability to deliver in a volatile environment demonstrates that we can pull the levers of our business to mitigate unforeseen downsides.

With that context, I will recap our Q4 and fiscal 2014 results. Nike, Inc. fourth quarter revenue grew 11% on a reported basis and 13% on a currency neutral basis bringing our revenue to $27.8 billion for the year, up 10% as reported and up 11% on a currency-neutral basis. Nike Brand futures orders advanced 12% on a currency-neutral basis, driven by an 8% increase in units and a 4% rise in average selling price. Growth was led by continued strength in North America and Europe, even as our futures window moved beyond the World Cup. On a reported basis, futures grew 11%, reflecting weaker international currencies, particularly in Japan and developing markets such as Brazil, Argentina, Russia and Turkey.

Fourth quarter diluted EPS increased 3% to $0.78 bringing full year EPS to $2.97, up 11% versus last year. Strong revenue growth, gross margin expansion and a lower share count more than offset SG&A investments and currency headwinds to drive EPS growth for the quarter and the year. As discussed on our previous call, our SG&A was more concentrated in the fourth quarter, primarily reflecting demand creation investments behind the World Cup. We estimate that changes in currency exchange rates, including the impact on gross margin, other expense and P&L translation reduced our year-on-year EPS growth by 7 percentage points for the fourth quarter and 8 percentage points for the full year.

Gross margin increased 170 basis points for the fourth quarter and 120 basis points for the year. The expansion for both periods was primarily driven by higher average prices, reflecting the power of innovative products and strong brands, as well as the continued strength of our DTC business. These upsides more than offset downward pressure from product cost inflation and FX headwinds. Gross margin for the quarter was better than expected mainly due to the strong performance of our growing DTC business, a mix shift to higher margin product and higher margins on closeout sales.

As we expected, Q4 demand creation spending was significantly higher than last year, driven by marketing investments in the World Cup and key product initiatives. Full year demand creation grew 10% in line with our full year revenue growth, largely driven by an increase in sports marketing expense, as well as marketing for global sporting events and new product launches.

Operating overhead grew 13% for the quarter and 14% for the full year. This reflected support for key growth initiatives, such as DTC and consumer digital, as well as infrastructure investments to support Nike’s current and future growth. Other expense, net was $17 million for the quarter and $103 million for the fiscal year, driven largely by foreign exchange losses, primarily from developing markets.

The fourth quarter effective tax rate was 23.5% higher than last year’s 22.9% rate, which benefited from a reduction in tax reserves related to foreign operations. For the full year, our effective tax rate was 24%, a 70 basis point improvement over the prior year primarily due to an increase in earnings from lower tax jurisdictions. We continued to deliver strong returns on capital in FY ‘14, as ROIC reached 24.5%, 70 basis points above last year. For the year, we delivered $2.1 billion in free cash flow and returned $3.4 billion in cash to shareholders, in the form of share repurchases and dividends.

As of May 31, inventories were up 13%, a somewhat faster rate of growth than revenue or futures. Our inventories are healthy in most markets, reflecting builds to support the World Cup and to optimize the flow of goods in Europe and China. We are continuing to work through higher inventories in Latin America, particularly Mexico as a result of the distribution center issues we experienced earlier in the year.

Now, let’s look at our performance by segment. North America delivered a great year, as revenues grew 10% to $12.3 billion, marking the fourth consecutive year of double-digit revenue growth. For the fourth quarter, revenue also grew 10% led by double-digit growth in basketball and global football. In Q4, DTC revenue grew 21% driven by an 8% increase in comp store sales and significantly higher revenues. For the year, EBIT for North America grew 16%, as strong top line growth and gross margin expansion were partially offset by higher DTC operating costs and demand creation.

As Trevor described earlier, Western Europe also had a fantastic year, as revenue reached nearly $5 billion, up 14% on a currency-neutral basis. Fourth quarter revenues grew 18%. FY ‘14 reported revenue for Western Europe grew 19%, while EBIT increased 33%, driven by revenue growth, gross margin expansion and SG&A leverage, as well as FX benefits from the stronger euro.

In the Central and Eastern Europe, currency-neutral revenues increased 12% in Q4 and 15% for the year, with growth in every key category, except Action Sports, and every territory except Israel. Football, running and women’s training were the fastest growing categories, with each reporting growth of 20% or greater for the quarter and the year. Russia, Turkey, Poland and Greece each reported double-digit growth for the year. On a reported basis, FY ‘14 revenue grew 13% and EBIT grew 19%, reflecting revenue growth and expanding gross margins. In Q4, EBIT fell 10% as stiff FX headwinds and SG&A investments more than offset higher revenues.

In Greater China, currency-neutral revenue grew 2% for the quarter and 3% for the year, led by strong DTC growth. For the year, reported revenue increased 5%, while EBIT was flat, as revenue growth and gross margin expansion were offset by higher SG&A, reflecting investments in DTC and our new headquarters in Shanghai. In Q4, EBIT fell 12%, largely reflecting the timing of demand creation and operational investments.

As Trevor noted, we are seeing great results from the actions we are taking to reset the China market for renewed growth. For FY ‘15, we expect revenue for the geography to grow at a high single-digit rate. As we have discussed before, we expect quarterly growth will vary, as we fine tune the seasonal flow of product into the market and given the significant variations in prior year comparisons. We expect those factors will drive somewhat faster revenue growth in the first quarter.

In Japan, currency-neutral revenues were flat in Q4, but up 5% for the year, driven by growth in sportswear, football and basketball. DTC revenues increased 18% for the year, reflecting comp store sales growth, as well as the launch of On a reported basis, results in Japan were significantly impacted by the weaker yen. For the year, revenue was down 12% and EBIT fell 6% on a reported basis.

In our emerging markets geography, currency-neutral revenues grew 13% in FY ‘14, despite logistics issues in Mexico earlier in the year and generally weak macroeconomic conditions across Latin America. Every key category, except men’s training, posted higher revenues for the year paced by football, running and sportswear. The geography finished the year strong, with Q4 currency-neutral revenues up 25%, reflecting double-digit growth in nearly every territory and in most key categories. On a reported basis, results in the emerging markets were also significantly affected by weaker currencies in a number of developing markets.

FY ‘14 revenue grew 3%, but EBIT fell 3% as the FX headwinds eroded gross margins and generated losses on the other expense line. EBIT increased 8% in Q4, as stronger revenue growth was only partially offset by FX and World Cup demand creation investments.

Converse continues to deliver strong growth with revenue up 15% on a currency-neutral basis for both the fourth quarter and the full year. The growth was largely organic driven by mid-teens revenue growth in Converse’s direct distribution markets, particularly the United States, China and the UK, as well as expansion of the direct-to-consumer business. For the year, reported revenue grew 16% and EBIT grew 17%, as gross margins expanded. Fourth quarter EBIT increased 6%, as higher revenue and gross margins were partially offset by investments in infrastructure, DTC and demand creation.

Nike delivered strong growth in FY ‘14 and we are beginning the new fiscal year with great momentum across our portfolio. Our FY ‘15 guidance reflects that momentum, as well as continued investments in growth drivers such as DTC, product innovation and consumer digital, along with the operating capabilities to support our growth. Overall, our expectations for FY ‘15 are largely unchanged from what we shared last quarter. Specifically, for the year, we expect reported revenue to grow at a high single-digit rate, reflecting low double-digit currency-neutral growth partially offset by continued FX pressure from developing market currencies.

We expect Q1 reported revenue to grow at a low double-digit rate, driven by tremendous energy around the World Cup and continued growth in North America, Europe, China and the emerging markets. We expect gross margin for Q1 and the full year to expand by about 75 basis points. We expect average selling prices to increase driven by our ongoing focus on optimizing pricing and driving our product mix to premium. Growth in our DTC business should also benefit gross margin helping to offset increases in product input costs, particularly labor.

As both Mark and Trevor discussed earlier, our growth strategies are working and we will continue to invest in them. For Q1, we expect demand creation to grow at approximately 30% as we continue to leverage the energy of the World Cup. Operating overhead for Q1 is expected to grow in the high-teens, reflecting investments in innovation, consumer digital, DTC and key operating capabilities. For the full year, we expect total SG&A to grow at a similar rate as FY ‘14. For FY ‘15, we expect the effective tax rate will be approximately 25%.

As Mark said at the top of the call, by staying focused on consumer engagement and relentless innovation, we drive value for our shareholders. We are proud of the strong results we delivered in FY ‘14 and we are more confident than ever that we will deliver sustainable, profitable growth and value for our shareholders. We are now ready to take your questions.

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