Last October, Nike (NYSE:NKE) CEO Mark Parker shared an ambitious goal for his company -- to reach $50 billion in annual sales by fiscal year 2020, a 63% increase over fiscal year 2015. Almost immediately afterwards, Nike's sales stopped cooperating. Foreign currency headwinds and competition from other sports apparel companies have been blamed for slowing growth rates.
After a rough few quarters, however, the recent first quarter showed promising increases in sales growth rates. Will it be enough, or is Nike's ambitious goal off track?
Nike's sales speed up, but the market isn't impressed
For the first quarter ended Aug. 31, Nike reported $9.1 billion in sales, an 8.3% rise year over year and above analyst estimates. It was a welcome jump from the 6% growth in the fourth quarter of fiscal 2016. Other than Nike's increasing sales growth, the company also reported EPS of $0.73, a 9% rise year over year.
Much of that EPS growth was due to a one-time tax advantage that allowed Nike to pay just 2.5% taxes for the quarter, but still means that average taxes for the year will likely be lower than last year's. Earnings should be up for the full year over last year. Even with sales and EPS speeding up, the stock took a hit after the earnings were released.
Nike's sales and EPS growth in the quarter speeding up is a good sign. What has investors worried is that futures orders, a Nike-invented system which tracks future shipments of Nike gear, were down to 5% worldwide, and just 1% in North America. Sales have increased, but at a far slower rate than for competitors, and many investors fear that the quarters to come could be slower based on the reported futures orders.
Can Nike still meet its ambitious goal?
For Nike to reach its 2020 sales goal, sales would need to increase around 11% annually from 2017 to 2020. With 8% growth year over year in Q1, it's plausible that sales could increase a few more percentage points from here. CEO Mark Parker said after fiscal year 2016 that "We remain confident in that long-term projection," and that seems to be even more true after Q1.
Nike continues to invest in key growth opportunities, one of which is a rise in e-commerce worldwide. Reported futures orders don't factor in how successful Nike has been at growing its direct-to-consumer sales, particularly through Nike.com, which skyrocketed 49% year over year during the quarter. In Q1, Nike launched updates to its various mobile apps, which are now more tailored to mobile shopping. This should help e-commerce sales increase even more the rest of this year.
China is another area where Nike feels confident it can grow faster. During the Q1 earnings call, Nike President Trevor Edwards said that "In Greater China, we continue to see great results with revenue growing 21% for the quarter. We are leveraging consumer sports moments such as the Olympics and the athlete visits by LeBron, KD and Russell Westbrook this summer. This energy is reflected in our category results with tremendous momentum across running, sportswear, Jordan and NIKE basketball." Nike is also working to expand its mobile and e-commerce platforms in China.
Let's not forget, Nike management did warn us that Q1 sales would continue to be pressured by foreign currency fluctuations and other issues, but that sales would likely pick up more in the second half of the year thanks to demand generation from the Olympics and better sell through following inventory issues that have led to lower average sales prices.
This 8% sales increase this quarter was a nice step in the right direction, and the company is confident that it will continue to speed up the rest of this year. The market's grim reaction to these fairly good earnings could be a great buying opportunity into a well performing stock with plenty of growth left that's now trading at just 23 times earnings.