Nike Inc. had another mixed quarter, but is expecting things to take a turn for the better in the months to come and has even made a tech acquisition as part of its continued focus on digital.
Revenues for the company’s third fiscal quarter rose 7 percent to $8.5 billion, but the company recorded a net loss of $921 million, equal to 57 cents per diluted share.
Last quarter showed a similar picture of revenue growth and falling profitability, but Nike pointed to last year’s tax reform as largely to blame for the third-quarter loss. The company’s effective tax rate came in at 179.5 percent, estimated to be a one-time expense of $2 billion stemming from the transition of foreign earnings and a “remeasurement of deferred tax assets and liabilities.”
Even without the change to taxes, net income fell 12 percent to $1.2 billion, with Nike citing lower gross margin and higher expenses while noting it came in above expectations. Selling and administrative expenses, including marketing and product launches, increased 11 percent to $2.8 billion during the quarter.
Going forward, Nike is expecting tax reform to be much more positive with its effective tax rate expected to fall around 10 percent in its fourth quarter. Andrew Campion, chief financial officer, said during a call with analysts that Nike’s digital business is “the top of the list” for investments of tax savings.
As for product sales, North America is still proving to be a drag, with sales falling 6 percent to $3.5 billion during the quarter, but international sales more than made up the difference. China rose 24 percent to $1.3 billion; Europe, Middle East and Africa rose 19 percent to $2.3 billion, and Asia-Pacific and Latin America rose 13 percent to $1.3 billion.
Chairman, president and chief executive officer Mark Parker said Nike’s “consumer direct offense drove strong double-digit growth across our international geographies, led by greater China.”
Parker added that the company is starting to see a “significant reversal of trend in North America,” with increased momentum around new product innovations and launches, the recent React shoe, and shopper experiences and efforts to reduce inventory taking hold. E-commerce in the U.S. also grew by double digits during the quarter, an acceleration in direct selling the company expects to continue.
Nike is also increasingly leveraging consumer data and wants to increase this tactic. It’s acquired Zodiac, a data analytics firm based in New York, for an undisclosed sum as part of this effort.
“Their proprietary tools will help us deepen relationships with consumers all over the world with the primary focus on our NikePlus members,” Parker said.
He added that Zodiac’s capabilities will be focused on “pumping up Nike membership and capturing demand signals in key cities.” The coming year is also expected to see a “blur” between Nike’s digital and physical store offerings, Parker said.
As for Nike’s pilot selling program with Amazon, Parker said the company is extending it after seeing some “good sell through” on a limited number of products its offering.
“We’ll continue to work with Amazon toward what we think will be a mutually beneficial relationship in the months ahead,” he added.
The ceo only briefly addressed the abrupt departure last week of Nike brand president Trevor Edwards. Parker unsurprisingly did not get into specifics, saying only that the company became aware of “some behavioral issues inconsistent with Nike’s values of inclusivity, respect and empowerment.”
Parker added that he wants “every Nike employee” to feel they’re in a positive environment where they can succeed and reiterated that with the management shake-up, he would be staying in his position “beyond” 2020. The executive did not mention the possibility of increased costs stemming from just-announced trade tariffs against China.
Looking forward to the rest of the year, Champion said a “reversal of trend” is expected in North America, where profitability is expected to return by early fiscal 2019.
For now, Nike is expecting overall revenue growth next fiscal year in the mid- to high-single digit range.
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