Following the release of Nike's
With investors placing their bets on whether Nike can continue expanding its brands into new markets, the company's growth prospects are a good question for us to investigate further. With Bodhi Zappa and Hank Schofield, I'll analyze the company's latest quarterly earnings conference call. Bodhi's idea of sports is catching air on a California wave, while Hank sees sport as something you eat. Their unique perspectives should help give us a much better understanding of Nike's plans on growing its empire.
The Swoosh goes to China
Jeremy: To grow earnings per share over the next few years, Nike plans to reduce its amount of shares outstanding. The company recently announced a new four-year, $3 billion share repurchase program, quickly following its last four-year initiative. But what are its plans to keep revenues growing?
Bodhi: Three areas stood out as key drivers of growth for Nike: emerging markets, new brands, and product innovations. CEO Mark Parker pointed to the rapidly expanding markets of China, Brazil, Russia, and India as important areas of investment in the years to come. Alongside dominant brands like Jordan and Nike Golf, the company hopes that newer campaigns including Joga Bonito and Lebron James will continue to solidify its identity among consumers. Finally, Parker highlighted innovative products like Air Max, Nike Plus, and SasQuatch Driver as ways to maximize its portfolio of businesses.
Jeremy: In the call, Parker states, "Nike is a growth company." He adds that his top priority as CEO is to concentrate on driving sustainable, profitable top-line growth. To accomplish this task, China will be a key factor, right?
Hank: Without question, every successful business wants a strong foothold in China, and sporting goods are no different. Through a combination of successful marketing like the China Just Do It campaign, and country-specific products like a China-only Lebron James shoe, Nike has doubled its business in the country to nearly $600 million in just the last two years.
Will rising costs toss Nike's profits into the cheap seats?
Bodhi: Here comes the "but."
Hank: Thanks for the transition, Bodhi. The cost of doing business is currently outpacing Nike's ability to pass higher expenses on to customers with price increases, putting the squeeze on gross margins. In the fourth quarter, they slipped to 43.8% from 45.2% a year ago. (Ryan Fuhrmann noted a few of the reasons.)
I will say that recently, Nike has been able to offset rising costs through favorable foreign exchange rates and the leverage of its typically more stable SG&A (selling, general, and administrative) expenses. How long will that last? Again, management expects a 100-basis-point drop in gross margins for the first quarter of fiscal 2007. I think it's dangerous to lose sight of these pressures in the midst of glossy figures like Nike's 60% market share in basketball shoes.
Jeremy: Since you raised the question of profitability, I'd like to note that EPS should be lower than year-ago levels in the first quarter, but as costs ease in the second half of the year, and as the company continues to leverage overhead expenses, management expects to deliver EPS growth for FY 2007.
Also noteworthy: Management is sticking with its long-term target of mid-teens EPS growth. Whether it's able to meet that goal this fiscal year remains to be seen.
Bodhi: Relax, Hank. CFO Don Blair states that Nike's business model is designed to grow gross margins "over time." Uncontrollable variables like record oil prices have put a wrinkle in the plan -- in the short-term. But on spending that the company does control -- branding, for instance -- Nike continues to dominate.
Hank, you mentioned the 60% market share in the basketball category. Just in the past year, Nike added five percentage points to this metric on the strength of its Nike and Jordan brands. Michael Jordan is washed up and retired, right? Well, his namesake brand is still doing amazing aerials, growing revenues by more than 40% for the year. This suggests that Nike is not only dominating but also continuing to strengthen its influence.
Jeremy: Since wholesale prices were fixed ahead of time, spiking oil prices ate into profits in FY 2006. But as Nike enters the back half of fiscal 2007, look for a combination of softening costs, continued leveraging of SG&A, and an inflow of higher wholesale prices to drive EPS growth for the full year.
Beyond short-term economics, Nike is priming itself for continued domination on the global stage. Recent inroads in the nation of China will be used as a testing ground for Nike's plans in Brazil, India, and Russia. In addition to its initiatives in emerging markets, Nike's high-flying brands and innovative products -- like the planned July launch of a partnership with Apple
Further Foolish conference-call analysis:
- Higher construction costs do little to dampen Bed Bath & Beyond's outlook.
- Darden Restaurants still has high hopes for its newer concepts.
- Circuit City plans to stay plugged into growth.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Fool has a disclosure policy.