Nike's long-term financial model is fourfold: (1) revenue growth in the high single digits, (2) EPS growth in the mid-teens, (3) expanding ROIC and (4) consistent increases in cash payouts to shareholders. Its goal is to have $28 to $30 billion in revenue by the end of 2015 and it believes it is on track to achieve that goal.
Nike's growth in revenues in fiscal year 2012---16 percent---was the highest in 15 years. However, it had unexpectedly high input costs that affected the bottom line.
In fiscal year 2012, Nike a number of new innovative products: FuelBand and Nike+ for Basketball and Training, new generations of Lunar and Nike Free, and a new approach to shoe creation called Flyknit. The demand for Flyknit is very strong and Nike is investing to increase its capacity to meet demand. In apparel, Nike created the Turbospeed suit for sprinters and new uniforms for all NFL teams.
Digital technology in products has just begun to show its potential. For instance, in running shoes, digital technology helps runners, who tend to be technology-oriented, to train, compete, and measure their performance. Most of Nike's innovation starts in Running, and then expands to other categories and other brands.
Nike's innovation can also be seen in its Global Football products. Nike developed the Mercurial VIII boot and the uniforms for the Euro Champs. In May, Nike launched the My Time is Now campaign, which has been seen by 20 million viewers on Youtube, to satisfy the appetite of footballers for great stories.
Nike has seen price discounting from some of its competition. It feels confident that it can deliver value based on its innovation. The innovation is taking place at all price points.
In apparel, Nike's Amplify Sports Strategy looks at apparel in three dimension: (1) how athletes compete, (2) how athletes train, and (3) how athletes express themselves. Nike believes this strategy is the key to growth in both apparel and footwear. It is integrating sportswear design into more of its apparel.
Nike continues to be able to grow in North America because its innovation, which creates excitement. It has also created successful destinations with its retail partners, such as the Foot Locker House of Hoops, the Nike Track Club at the Finish Line, and the Field House at Dick's Sporting Goods. Nike believes it has infinite potential in North America.
In Europe, Nike is paying close attention to the economy and currency issues. It saw good momentum in apparel and footwear. Nike is elevating distribution strategies to leverage the brand and its retail partners across Europe. It is gaining market share in Western Europe, but it does not know how strong of an economic headwind it will be facing.
In China, Nike had good growth. The market is evolving and the Chinese customer is getting more sophisticated and discerning. The market is also getting more competitive. In China, Nike is using more China-specific insights and product designs. It is continuing to expand the exposure of the Nike brand. It is differentiating its distribution model to expand market capacity and increase retail productivity, both in its own stores and online. The demand for Nike goods in China is quite strong and Nike is working hard with its partner retailers in China to improve their profitability.
On May 31, Nike announced its intent to divest in Cole Haan and Umbro in order to focus its efforts on the greatest opportunities for creating shareholder value. In fiscal year 2012, the two businesses combined accounted for $797 million of revenue and a $43 million loss before interest and taxes. Nike is in the process of preparing the two companies for sale and finding potential buyers. It cannot currently predict the financial effect of the sale. Its future guidance excludes the results from those two companies in fiscal year 2012 and 2013 and the financial results of any divestiture.
Evaluation of markets.
There is still a lot of uncertainty in the global economy and Nike expects the global economy to remain volatile in 2013. Commodity and labor costs are continuing to fluctuate. Currency pressures are increasing in Europe and in emerging markets.
China's economy is expected to grow more slowly than Nike has seen over the last 5 years.
Financials.
Revenues in fiscal year 2012 increased by 16 percent. NIKE brand revenues grew 16 percent. Converse revenues grew 17 percent. Nike's running business grew by 31 percent in constant currency in fiscal year 2012. Global football grew by 12 percent, excluding currency effects. Apparel increased by $400 million in fiscal year 2012.
Q4 revenue for Nike, Inc. grew by 12 percent. On a constant currency basis, Nike, Inc. and NIKE brand grew 14 percent and other businesses grew 16 percent. NIKE brand futures orders grew 12 percent on a currency-neutral basis. On a reported basis, futures orders grew 7 percent, reflecting a weaker euro. Nike hasn't seen any meaningful move on order cancellations. In Q1/2013, Nike expects single-digit revenue growth.
In North America, revenue for the fiscal year was $8.8 billion, an increase of $2 billion over the last 2 years. In Q4, North America revenue increased by 13 percent. There was growth in every category, with double digit growth in Running, Basketball, and Men and Women's Training.
In Europe, revenues were over $4 billion in fiscal year 2012 and increased 7 percent on a currency neutral basis. There was growth in every country except Italy. There were double digit increases in Running and Football, and a mid-single digit decline in apparel.
In China, revenues increased by 18 percent in a constant currency basis in fiscal year 2012 and grew 14 percent in Q4. Footwear revenue grew by 21 percent in Q4 and apparel grew by 3 percent. Future orders in China grew by 2 percent, reflecting a significant slowdown since Q3.
In Japan, currency-neutral revenues grew by 9 percent in Q4 partially due to comparisons to Q4/2011 that included the effects of the tsunami.
Excluding currency, revenue in emerging markets grew 23 percent in Q4. Nike had strong performance in Korea, Mexico, Brazil and Argentina.
Gross margin fell by 220 basis points during fiscal year 2012, even though Nike raised prices and improved its inventory position. Higher input costs were a drag on gross margins. Nike reduced the impact of the margin reduction by deleveraging SG&A expenses. Nike believes it can improve its gross margins through lean manufacturing, breakthrough innovations like Flyknit, supply chain efficiencies and pricing.
Gross margin in Q4 declined by 150 basis points caused primarily by higher input costs. Accelerated investments in digital R&D reduced gross margins by 70 basis points and an unanticipated customs assessment reduced gross margins by 20 basis points. The discounting of China and European sportswear had a negative effect on gross margins of 20 basis points. Going forward, Nike expects margins to improve sequentially, but not as much as earlier expected due to currency headwinds. In Q1, it expects margins to decline by 100 basis points, but for the gradual improvement to lead to year-over-year improvements in the second half of the year.
For fiscal year 2012, SG&A expenses increased by 11 percent, which was 5 points below revenue growth. In fiscal year 2013, Nike expects SG&A to grow faster than reported revenue—at high single digits or low double digits---as Nike continues to invest in its brands and innovation.
Earnings per share for fiscal year 2012 was $4.73, an increase of 8 percent. Earnings per share for Q4 were $1.17, a decline of 6 percent. The decline was the result of lower gross margin, planned demand creation investments, and a higher tax rate. The Q4 earnings also included a $24 million restructuring charge in Western Europe. Nike expects high single-digit EPS growth in fiscal year 2013. This is below its long-term goal of mid-teens EPS growth and is the result of the significant negative impact of weaker international currencies and a higher effective tax rate due to the shift of product mix to higher-taxed countries, such as the United States.
Inventory at the end of fiscal year 2012 was up 23 percent versus the end of fiscal year 2011. Growth in inventory has continued to fall each quarter and delivery timing has improved. Most of the growth in inventory comes from higher input costs, high growth geographies and new businesses, such as the NFL. However, there is still work to be done in Europe and China as Nike has too much inventory in those regions. It believes it will be able to move most of the Europe and China inventory by the end of the calendar year. 70 percent of its inventory is in regions other than Europe and China.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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