Market Watch: Nike’s Quarter, Impact On Industry and Conference Call Quips
Jeff Harbaugh
- October 01 2009
- 974 views
- 17 comments
Nike put out a press release on its quarterly earnings two days ago and held a conference call on their results yesterday. This has all happened before the actual 10Q with all the detailed information and footnotes is available. So on the one hand, I’d like to be timely and have this done before everybody loses interest, but on the other hand I’d like to have the best information I can have before expressing an opinion. There’s a concept!
The prepared comments that started off the conference call had a sort of “Aren’t we wonderful? Didn’t we do just what we said?” feel to them. From a business point of view I suppose they are and I guess they did. Still, I’d like to do my own analysis and not be lead by the hand to my conclusions. That’s why I’d like the 10Q to come out before the press release and the conference call.
Then come the questions from the analysts that work for the investment banks. The questions are usually preceded with some form of “Hey, how are you guys today?” Great Ralph/Sally/Fred! Good to talk with you again!” There’s a collegial sense to the conversations that seems to preclude tough questions.
To be fair, I’m not sure there are a lot of tough ones you could ask about Nike, but it still feels a bit like an attorney questioning his own witness at a trial. This isn’t an issue just with Nike. At the last Quiksilver conference call, nobody asked, “Where are you going to get revenue growth from?”As I’ve written, I think that’s the key issue they have to address.
There was one question from a guy named Brian on the Nike call whose last name I couldn’t quite hear from a company called Research something and I couldn’t hear the end of that either. I’m thinking he might not be an investment banker. Nike had announced that they were changing their primary profitability measure from pre-tax income to earnings before interest and taxes, “…which is the primary measure used by our management team and board to make decisions about resource allocation and to evaluate the performance of individual operating segments.”
Now, I see Nike’s point from a management perspective. But if I were an analyst concerned with the stock price, I’d know that net income is the primary determinant of stock performance over anything but the short term, and that’s what I care about when I look at a stock. Not pre-tax income, not earnings before interest and taxes, not proforma income, not earnings before extraordinary items, not even EBITDA- earnings before interest, taxes, depreciation and amortization. Call me old fashioned, I guess.
So my hero Brian steps up and asks, “Will the change to EBIT change the company’s focus on how you deploy capital?” I don’t think I have his questions exactly as he asked it, but the implication was that it wasn’t clear if the change was conducive to focusing on bottom line earnings. Nike, you’ll be stunned to learn, said that of course they would continue to be focused on bottom line earnings. They went on to explain that this didn’t change the way top management was measured and incentivized and that among the things they were measured on was stock price and earnings. Good answer I thought. Also the only one they could reasonably give.
So Brian, if you’re out there, thanks for asking a great question and keep up the good work.
Anyway, in the quarter ended August 31, Nike’s revenues fell 12% to $4.8 billion. Gross profit fell 14% to $2.215 billion. Gross profit percentage fell from 47.2% to 46.2% as a result of currency fluctuations and mark downs. Selling and administrative expense was down 17% to $1.546 billion. It actually fell as a percentage of sales from 34.2% to 32.2%, which is a good job with sales also down.
Because their income tax rate fell from 28.5% to 24.7%, they were actually able to increase net income by $3 million to $513 million.
The balance sheet is strong, to say the least. I guess their biggest issue is what they are going to do with $3.6 billion of cash and short term investments. That can’t be earning much given current interest rates, and I’m sure they’d like to see it deployed.
Revenues in all their categories (footwear, apparel, and equipment) declined in North America, Western Europe, Central and Eastern Europe, and greater China. Japan managed four and five percent increases in footwear and equipment respectively. The “Other Businesses” group includes Converse and Hurley. We learned in the conference call that “Converse grew revenue by 10% and delivered its most profitable first quarter ever, up 13% over last year.”
“Hurley delivered its 2nd biggest revenue quarter ever.” Nike reported that it “…gained share in the Action Sports Industry,” and “…continued to grow at a double-digit rate with market share gains while the rest of the industry declined.”
Overall, Nike’s action sports business grew 25% in the first quarter. Without giving any numbers, they noted that the direct-to-consumer business saw record revenue in the quarter. Online business was up 19%.
The interesting thing about Nike, of course, is that we’re even talking about them. I’m guessing it was only six or so years ago that nobody in action sports even cared about Nike. We’d go to their parties, drink their beer and laugh at their failed attempts to break in. They now seem to have figured it out. Partly that’s because they learned from their mistakes- always a good thing to do. But it’s also because being big in this industry is no longer a sin that automatically costs you credibility.
Too much analysis of their numbers is, frankly, kind of a waste of time. Their numbers are big and good. Complaining, as some have, that it’s somehow wrong for them to use their size and financial strength to push their action sports business at a time when other companies are weaker is a waste of time. I’d do the same thing in their position. So would you.
The question isn’t how Nike is going to run their business. I imagine they are going to do just fine, thank you very much. The question is how you are going to run yours, big or small, given what their success represents to the evolution of the industry.
Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.
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October 1st, 2009 at 5:01 pm
hi Jeff
thanks for your thoughts always like to read your reports , I have a question , I have an online show called
http://www.surfdonkey.ca trying to find advertisers is tough any suggestions would be great
we have had 1.5 million people watch the show
thanks in advance
lance
October 1st, 2009 at 5:15 pm
really good stuff Jeff. It is great to hear an honest opinion about Nike's business from someone inside the surf/skate industry. looking forward to reading more of your work.
October 2nd, 2009 at 9:38 am
Nothing very specific. Just that they like it and expect it to grow.
J.
October 2nd, 2009 at 3:45 pm
was there any discussion of their action sports retail plans?
October 3rd, 2009 at 5:29 pm
Lance,
I'm afraid I can't be much help on that one. I imagine you just have a bunch of phone and email work ahead of you to make the people who advertise on sites like yours aware that you exist.
J.
October 7th, 2009 at 3:35 pm
The numbers are good and I have spent my whole life before Vans in mainstream marketing and I can tell you that Nike has hundreds of Marketing people like me that set strategies
to take way small percentages at retail wall space, margins, marketing, terms, financing ect ect.
Say they gain .5% each year at 8 touch points over 7 years you can do the math.
Now to hunker down and protect the market they have left is to watch the market shrink.
I suggest that they pull back and take an hard core stance against anything not skate which they seem to be doing anyway. That is a radical idea but it might be better then being a party to mass market companies owning the sport you love.
Best Jay
October 8th, 2009 at 3:48 pm
Jay,
I think you and I are in violent agreement here. All they have the resources and credbility to do is try and protect the hard core market- even if that limits their growth potential. What growth there is for them has to come from building credibility and importance around the core and expanding that piece of the market.
Hope we have the opportunity to continue this conversation over a beer sometime.
J.
October 8th, 2009 at 5:01 pm
I hope stores wise up, either that or nike needs to start making something special again for the core shops, because right now they have nothing going on but shoving product down your throat and watering it down with 6.0. I think retailers will do a huge pull back, just like they did with burton and then nike will have to go back and rebuild the relationships just like burton is having to due. I'm not sure if it costs more or less to do that, but it sure seems like a shame.
October 8th, 2009 at 5:35 pm
I know of quite a few core skate retailers who are in business today only because of the profit they have been able to make from sales of Nike SB during the last couple years. And 25% core market share doesn't mean the brand was 25% of the shoe wall — Nike SB has been turning twice as fast as the average skate shoe brand, so their share of visual space could be even half of their market share.
I'm sure a lot of these core shops with an "over dependence" on Nike SB are afraid of that dependence, but it has kept their doors open. If Nike SB sales wane (due to expanded distribution of 6.0 or any other potential reason), let's hope these core shops can adjust their strategy and find other ways to make their stores profitable. Indeed, it would be great if they could get it from some of the smaller shoe brands that come up with a "must have" product.
October 9th, 2009 at 3:00 pm
Hi Cary, I just have to say that you have a great service you should give your company a prop. I think we all agree that Nike sold a lot of shoes in the core with SB then they expanded and created 6.0 to make a lot more and take away some of that mainstream gravy. Did they do a great job, yes, the best when you look at the numbers. Did the Skate shoe companies drop their guard and continue to do the same old product. Yes and they all look the same and that is how they lost market share. I met with a lot of the shoe companies 3 years ago and they didn't want to hear about Nike taking over, well that sealed their fate. Nike looks at all the data every day/week/month and uses it to strike at the week points. Cary call me lets chat some more. Jay Wilson
October 9th, 2009 at 3:52 pm
Cary,
Thanks- It's always good when somebody with real, actual numbers clarifies things. How did you resist the temptation to talk about gross margin return on inventory investment?
J.
October 9th, 2009 at 3:57 pm
Yeah right,
The difference between Burton and Nike is that Burton needs the core shops a lot more. Remember- think like Nike. They are $11 (or is it $15- whatever) billion in revenue. Every thing they do is to grow that broader market and build their credibility. Burton sells snowboards, snowboard equipment and snowboard apparel to snowboarders. Mostly. Nike sells shoes and apparel to, well, everybody. If I were Nike, I think I'd work hard to maintain my core skate market credibility in the belief that it would generate sales of other Nike product that far exceeds what they can sell in skate shoes. But then, I don't get out very much.
Thanks,
J.
October 9th, 2009 at 3:59 pm
Well, I think I'll just go away and let Jay and Cary take over this conversation. Great job gentlemen.
J.
October 9th, 2009 at 4:42 pm
ok,
well we have some shoe experts , lets elaborate on 6.0 and the effect it is having on sb?
Really who is buying sb? Skateboarders?
Would love to hear your opinion
thanks
October 9th, 2009 at 7:13 pm
Hi Boys, Now we are getting down to the heart of the problem. Skate shops are counting on the mainstream kid who buys Nike to help make his overhead. Skateboarders are buying skate shoes but all the growing in the market over the last 10 years has come from GenY 78 million strong, Gen X was only 35 million, so 100% more skaters and much more mainstream wanna be skaters. The problem is not only the downturn but the fact that Nike/Converse and Vans has picked up all the wanna be's leaving just skate shoe companies competing for a smaller pie. I hope this helps understand the market and what is going on…Best Jay
October 9th, 2009 at 7:33 pm
ok, so now nike kids are going back to the mall and buying 6.0 and since the sneaker heads are not into the sb thing anymore it pretty much put sb dead in the water. Our shoe biz is doing well just not the nike thing. By the way our vans rep kicks ass
November 13th, 2009 at 6:09 am
Cary, Jeff, and Jay,
I have a sure fire way to add a few dollars to almost every skate shoe sale!!!! I'm doing market research right now and that is how I came across this Blog… I could really use some help and I would be willing to make it worth your while. My email is jeffsiegfreid@gmail.com. It sounds like all three of you are in tune with the industry would know how to navigate the closed doors and red tape. If your interested in quite possibly a once in a lifetime opportunity shoot me an email and we could set something up. As you know in Action Sports if you don't try to go big…. you never will!
Thanks
Jeff Siegfreid