It is not every day you see a company report a 13% decline in net earnings, and then see its stock pick up nice buying on the Street. Yet this is what happened when Nike (NYSE: NKE ) released its fiscal 2007 first-quarter results. Despite the drop in earnings, Wall Street is reacting favorably to Nike's shares, partly because of solid top-line growth expectations for the remainder of the year.
Obviously, with a company the size of Nike, there are seemingly innumerable variables involved in its expectations. We will not pretend to address all of these; instead, our analysis of Nike's latest quarterly earnings conference call will center around three key topics:
- Nike's 90-day reinvention process
- Getting bigger by getting smaller
It's about China. duh!
In my previous analysis of Nike's fiscal 2006 fourth quarter conference call, I commented briefly on the company's major campaign in China, called China Just Do It. Original, isn't it? What the campaign is lacking in the creative headings department, it seems to be more than making up for with appealing product offerings like a China-specific Lebron James shoe.
Over the past two years, Nike's revenues have more than doubled in the region, and it is well on pace to "surpass the $1 billion revenue mark" by fiscal 2009, making China its second-largest area of business after the U.S. On a constant currency basis, revenues from the Chinese market this quarter grew over 30% compared to the same period a year ago. Only Central and Eastern Europe can match this level of growth -- they also increased revenues over 30% since the year-ago period.
Charlie Denson, President of Nike Brand, declared confidently, "We're widening the gap in China." Just in the past quarter alone, he added, "We've seen our footwear market share increase another 5 percentage points." The brand also expanded its lead in China apparel.
Nike reinvents itself ... continuously
One reason the Chinese market is attracted to Nike is the same reason the rest of the world is -- its relevance. The comment that stood out for me the most during the very detailed conference call is this remark by Denson: "Across every geography and category it is our relentless flow of innovation and our deep consumer connection that gives us our competitive advantage. As a brand we literally recreate ourselves every 90 days with new products lines and consumer concepts."
Assuming this isn't executive-speak and Nike does indeed reinvent itself every 90 days, then two critical qualities are needed: effective inventory management and appealing product offerings. Not surprisingly, these two topics were repeatedly addressed throughout the call.
It's worth adding a few words on the inventory situation, as it was an area of concern raised during the Q&A portion of the call. Some analysts were worried that Nike's inventory for the quarter grew 15% year over year, significantly outpacing both the 9% top-line growth for the period and the high-single-digit growth expected in the upcoming quarter.
"We're on top of it" may best summarize management's response. In a nutshell, Nike likes the "quality" of its inventory, and believes its current closeout levels (down 6%) are in "great shape." More to the specific concern, the company made an operational decision to ramp up inventory levels for back to school, but this inventory growth will "normalize" over the remainder of the year.
Getting bigger by getting smaller
The final topic I want to address relates to a discussion that took place during the Q&A portion of the call, regarding the company's reorganization efforts. An analyst queried what prompted management to shift things around, and what is to be expected from the changes.
Denson responds, "We can do a much better job continuing to grow the business by breaking it down into smaller pieces and getting more focus and deeper involvement and connectivity with key groups of consumers." CEO Mark Parker weighed in on the topic as well, adding, "This is an absolutely essential key strategy for Nike to grow."
The strategy isn't new for the company, having employed it previously with its Air Jordan and Nike Golf concepts. Given that success, it makes sense to scale this out to the other categories. This "smaller pieces" approach will help Nike stay on top of rapidly changing fashion tastes among consumers.
For example, its Sports Culture segment would've benefited nicely from this street-level approach, by bringing Nike to the low-profile shoe craze sooner. Although late to the game, Nike has responded nicely in this area, with low-profile shoe line Metro -- which is doing extremely well, with over 250% revenue growth for the quarter. With this reorganization, Nike is hoping to capitalize on such trends more quickly.
One of the trademark qualities of the finest businesses on Wall Street is that they are continually looking for ways to improve. Every time I dive into Nike, my analysis leads me to the same conclusion: Nike is the best in its biz because it keeps getting better. Thus it remains a solid candidate for any long-term-minded investor.
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