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Highlights From NKE's Q1 Conference Call: Q2 Revenues Expected To Be Down Low-to-Mid Single Digits

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September 30, 2009 11:32 AM EDT

Nike Inc. (NYSE: NKE) reports Q1 EPS of $1.04, 7 cents better than the analyst estimate of $0.97. Revenue for the quarter was $4.8 billion, which compares to the estimate of $4.90 billion. Shares are up almost 7.5% today.

Highlights From NKE's Q1 Conference Call:

(CEO) While consumers remain cautious, NIKE continues to connect through innovative products and compelling experiences in the marketplace.
We feel very good about our relationships with consumers around the world, and we continue to gain share in key markets and categories.
Digital commerce, which posted 19% growth for the quarter and outgrew the online industry by a wide margin.
Elsewhere in the portfolio, Converse grew revenue by 10% and delivered its most profitable first quarter ever, up 13% over last year.
Hurley delivered its second-biggest revenue quarter ever. Along with NIKE and Converse, Hurley gained share in the action sports industry. In fact, Hurley continued to grow at double-digit rate, with market share gains, while the rest of the industry declined.
Cole Haan and NIKE Golf both operate in sectors hit especially hard by the economy. But inventories are clean, and we have lots of innovation in the product pipeline.
(President, NIKE Brand) The LeBron and Kobe footwear franchises continued to lead NIKE Basketball, and the Jordan brand continues to post some impressive results. Our combined basketball business delivered high-single digit revenue gains over last year.
Action sports posted the biggest category percentage gain in Q1, up strong double-digits.
We continue to make gains on the performance side of apparel.
Let's move on to Western Europe, and that means football. And while overall the category was down in revenue, we continue to gain footwear share in key markets.
Running and sportswear were down, while action sports and basketball turned in some strong revenue increases in this geography. And women's training also delivered solid results, driven by apparel.
Central and Eastern Europe, this is our most challenging geography of all.
Greater China. Well, revenue was down, but we separated ourselves from our competition and we remain the number one brand. Basketball continues to drive excitement in this market.
Next up, Japan. Very tough economically. Consumers continue to be very cautious.
And finally, the emerging markets, which include South America, Central America, including Mexico, the Pacific countries, and Korea. Very solid performance here.
(CFO) Revenue for the quarter declined 12% to $4.8 billion. On a currency-neutral basis, revenues for both NIKE, Inc. and the NIKE brand were 7% lower than last year.
Revenues for our other businesses, including Cole Haan, Converse, Hurley, NIKE Golf, and Umbro, fell 5% for the quarter, declining 3% on a currency-neutral basis.
Futures orders for NIKE brand footwear and apparel scheduled for delivery from September through January 2010 are down 4% on a currency-neutral basis, reflecting sequential improvement from fall through the holiday and spring seasons. On a real-dollar basis, futures orders fell 6%.
Gross margin for the quarter declined 100 basis points to 46.2%.
SG&A for the quarter declined 17% versus the prior year and was 13% lower on a currency-neutral basis. Excluding currency, demand creation was 28% below prior-year spending.
Our effective tax rate for the quarter was 24.7%, an improvement of 380 basis points versus last year.
At the end of Q1, our cash and short-term investments totaled $3.6 billion, or over $7 a share. Subtract our outstanding debt, and we still had over $6 of cash on the balance sheet per each NIKE share.
Inventory units fell 12% versus a year ago.
In the first quarter of fiscal '10, North America revenue declined 5%.
Our direct-to-consumer revenues from owned retail stores and online commerce grew 3% for the quarter, driven by new store openings and double-digit growth in online sales.
North America footwear revenues declined 4% in the quarter as we continued to gain share in a difficult market. For the 12 months ending August 2009, the NIKE and Jordan brands combined added over 1.5 points of market share in the U.S., while Converse added almost a full point.
For the quarter, North America EBIT increased 10% to $411 million, as lower SG&A and improved gross margins more than offset the impact of lower revenues.
In Western Europe, revenues for the quarter declined 18%. On a currency-neutral basis, revenues fell 8%. Excluding the currency impact, footwear revenues declined 5%, and apparel revenues fell 11%.
In Central and Eastern Europe, or CEE, the macroeconomic environment has become very challenging after a number of years of explosive growth. First-quarter revenues declined 23% on a currency-neutral basis.
Q1 revenue for Greater China, which includes Taiwan and Hong Kong, fell 16% versus the prior year.
While we expect comparisons to remain challenging in Q2, futures orders improved sequentially from fall to holiday and have returned to growth for spring. Q1 EBIT for Greater China increased 7% to $149 million, as lower SG&A spending more than offset lower revenues.
In Japan, revenue was flat for Q1, reflecting the stronger yen and a 10% decline on a currency-neutral basis, driven by weakness in the apparel market and a sluggish economy.
The emerging markets delivered strong results in Q1, as revenue increased 9% on a currency-neutral basis but fell 8% on a reported basis as a result of significant currency devaluations in many of these countries.
For Q2, consistent with current futures, we expect revenues to be down in the low to mid-single digit range on a constant-currency basis.
We still expect Q2 gross margins to be below the prior year, although the year-on-year decline should be less than 100 basis points.
We continue to expect FY '10 SG&A will be down slightly for the year, with Q2 flat to down and mid to high single digit growth for the second half.
(Q&A) Can you give us an update in terms of where you think we are on the Swooshed-shaped recovery, with the results and with the futures that you reported? And the second one for Charlie. Don gave some interesting tidbits around the China business, but I was wondering if you can elaborate a little bit more on the trends in China, the health of the market, and just the sort of the outlook a little
bit more? (A)Your first question, yeah, I got a lot of feedback on that Swoosh-shaped recovery from the last call. And I don't propose to be an expert on the economic recession and where we're going. But I will say that - and you've heard this in the prepared remarks upfront - but what we're seeing here is sequential improvements in a lot of the indicators. So we remain, as I said, very prudent in terms of managing through this time. But we see some reason to be cautiously optimistic as we move forward.
So I would still say that the Swoosh-shaped recovery is something that we're looking at and believing in. But again, we're cautious and playing our role in this industry in a prudent way, but balancing that with the right amount of opportunism. And I think - hopefully that came through loud and clear in
our remarks. (A)I think China is a little bit of a microcosm of what Mark just talked about. I think we're seeing - we talked about this, I think, the last couple of calls - where we saw China as potentially being maybe first to the recovery line, when you looked at some of the global economies. I think that is playing itself out to some degree. We are seeing a sequentially improving futures number on the back half of the year and feel really good about where we are both as a brand and where our brand fits in the marketplace with regards to the health of the marketplace. I think we reacted very prudently and quickly with regards to our supply chain and our management of inventories in China. And I think that's playing out to our advantage, certainly in the short term. Where it goes on a longer-term basis, I don't have any more insight than you do on that that we could talk about. But I think that from an operating standpoint, our brand continues to have a great and very strong brand position with the consumer, and our commercial environment is as healthy as any of our competition. And in my opinion, I think much healthier. So we're cautiously optimistic about China.
And Charlie, in China, can you talk a little bit about gross margins, the pace of distribution, any changes there, and sort of inventory levels around the industry? (A)Overall the industry still suffers from a bit of overhang coming out of Beijing. I think we're in better shape than most. The expansion plans have obviously slowed. The capital expansion with some of the retail partners is being encumbered a little bit by some of that inventory. So we've seen some of that slow down a little bit. We are staying pretty much on plan with regards to our position on expansion, and we're investing in some of our own retail as well.
Two questions. I guess, first, just looking at currency - and I recall last time you guys spoke about the gross margin impact primarily due to what was going on from a currency perspective. Just given where the U.S. dollar has trended now, and - relative to the euro, the pound, the yen - what impact is that having when you look at your gross margin trend? And maybe just - I know you talked about seeing it down no less than 50 bps for the year. But to what degree does the fluctuation in currency that you're seeing right now play into it? I'm just kind of - what your thoughts are in terms on how you're looking at currency on the gross margin? (A)Well, I think that we certainly are seeing a little bit more benign environment on currencynow than what we had potentially expected earlier. And that is one of the drivers of the improvement in gross margin. There are others, as I mentioned in the prepared remarks. We've made great progress in our supply chain in terms of product costs and managing through the factory consolidation. But certainly I think we're in better shape from an FX standpoint in the sense that the dollar has weakened a bit. One thing I do want to make sure I remind people is we certainly do a pretty thorough job of hedging the major currencies. A lot of the action in the gross margin space over the last 12 months has been in the smaller currencies, and those are still pretty volatile. But I think actually currency is definitely looking up in terms of where the trend lines are going.