Growth drivers for Nike
Nike (NKE) is expecting fiscal 2016 to be “its best year yet,” according to CEO Mark Parker. The company’s guidance projects revenue growth in the mid-single digits on a reported basis, and a low double-digit growth rate on a constant currency basis in fiscal 2016.
Nike reported futures orders of $13.5 billion to be fulfilled over the period of June to November 2015. This represents year-over-year growth of 2%. However, constant currency growth was much higher at 13%. The increase was driven by rising selling prices, which were up 5%, and higher volumes, which were up 8%, as per CFO Don Blair.
As these orders don’t include certain businesses like DTC sales and Converse, which are actually faster growing businesses compared to wholesale channels, actual revenue growth performance is likely to be better.
The company expects gross margin expansion of 0.5% over fiscal 2016, according to Don Blair. This is in line with Nike’s long-term strategy of improving gross margins by 0.3% to 0.5% each year. Nike plans to achieve this target mainly with increased focus on company-owned stores and web sales, which have better pricing and margins. In fiscal 2015, Nike surpassed its profitability target, expanding its gross margin by 1% year-over-year to 46%.
Nike also expects an upside in profitability from lower energy costs. Some of the upside is likely to be mitigated by higher input and labor costs.
The 4Q15 earnings call was also the last for long-time Nike veteran and CFO Don Blair, who is retiring. He’s been CFO since 1999 and will be succeeded by Andy Campion, effective August 1, 2015.
Peer group outlook
Nike’s results and those of its peers are expected to benefit from the improving fundamentals in the US, their largest geographic market. These firms should also benefit from the improving retail situation in the key markets of Germany and the UK.
Nike’s uniforms sponsorship deal with the NBA starting in 2017 should also provide room for future growth.
Nike’s operations in China have seen a minor turnaround in fiscal 2015, as we discussed in part four. In the coming years, the company and global rival Adidas (ADDYY) should continue to benefit from the growing popularity of athletic pursuits, higher disposable incomes, and resultant spending (XLY) (RXI) patterns in China (FXI).