Nike has managed to offset higher input costs to drive revenue and earnings growth

Nike has managed to offset higher input costs to drive revenue and earnings growth

Wind the clock back three months and there were black clouds on the horizon for one of the leisure industry’s biggest success stories of the past few decades: Nike missed its profit target for the first time in four years, impacted by rising raw materials costs.

Come back to the present and one thing hasn’t changed. Indeed, gross margins in the US company’s fourth quarter were down 310 basis points to 44.3%, mostly because of rising product costs, but also due to higher freight expenses.

These increases more than offset gains through rising direct-to-consumer sales and cost reduction initiatives – and yet Nike was able to report net income up 14%, matching revenue growth and beating the expectations of most of those on Wall Street.

That it did so was thanks to rising revenues pretty much across the board, with the only black mark on the top line an understandable one – football revenues declining in the face of comparisons with the run-up to last year’s World Cup in South Africa.

The headline areas for growth included, not surprisingly, greater China with revenues up 21% and emerging markets (up 25%).

More encouragingly for a business that still relies on North America for more than one-third of its business, revenues there soared up 22% to US$2.1bn.

Meanwhile, western Europe edged up 5% in revenue terms and central and eastern Europe was basically flat – only Japan really disappointed, where revenues plummeted 17% on the after-effects of the earthquake and the country’s continuing economic woes.

The results are clearly positive for Nike, but will also be keenly pored over by the company’s rivals, eager to learn from the way in which the business has managed to enforce price rises to offset cost increases, but still maintained strong revenue growth.

That Nike has pulled off this particular trick is down to a number of factors: its strength in emerging markets and particularly in China being the most obvious one.

But the growth in North America shows that Nike has also persuaded cautious US consumers to open their wallets, which analysts ascribe to the company’s presence in higher-priced segments of the sporting apparel and footwear market.

Furthermore, although the company can do little to stem the rising costs of raw materials like cotton, it has managed to cut spending in other areas, with selling and administration expenses rising just 2% to $1.8bn, well short of revenue increases.

Nike’s reported futures orders suggest continued growth, although perhaps not quite at the level of these results: up 12% on a currency-neutral basis, led by emerging markets, greater China and North America.

How far those encouraging figures will translate into hard sales remains to be seen – Nike itself admits that they may be inflated by other factors, such as growth in replenishment of high-turnover styles, early delivery of seasonal items with longer lead-in times and the growth of the company’s direct to consumer operations.

But, for the moment at least, the company has provided a one-quarter masterclass in how to absorb the current inevitable increases in raw materials costs and still drive revenue and earnings growth.