Nike (NKE 0.99%) shareholders are hoping for an early Christmas present this year. The sports apparel giant posts its quarterly results after the market closes on Thursday, Dec. 21, right in the thick of the holiday shopping crush. And while investors are growing more pessimistic about rival Under Armour's (UA 1.79%) (UAA 2.26%) business, they have made the opposite judgment on Nike recently.
After all, there are some good reasons to expect positive news from Nike in a few days.
A potential rebound in the U.S.
For starters, Nike might reveal stronger demand trends in the U.S. market, its single biggest geography. That segment has been struggling for over a year as retailers battled over a shrinking pool of customer traffic. But through that downturn, Nike's retailing network has done a good job of clearing out excess inventory so that stores entered the holiday season primed for more profitable sales even at a slower growth pace.
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It looks like the industry could see both a faster expansion and increased margins, though. Foot Locker, which sources most of its products from Nike, announced surprisingly strong growth in mid-November along with plans to continue whittling down its U.S. store base. CEO Richard Johnson also predicted that the chain would likely beat management's holiday season guidance due to the rising demand executives were seeing around new product launches like Nike's VaporMax and Air Max running platforms.
Those comments match up well with the positive outlook that Nike issued in late October calling for innovation to drive healthy growth in the U.S. market starting this fiscal year.
Looking healthy in international markets
Nike gets more than half of its revenue from markets outside of the U.S., and that's a key reason why its broader growth has held up at its modest pace even as Under Armour's collapsed in the past 18 months.
UA revenue (quarterly year-over-year growth). Data by YCharts.
Executives believe these emerging markets are critical to Nike's long-term growth. In fact, they see China soon becoming their biggest arena before growing to as much as 10 times the U.S. in terms of the size of its core demographic of active, sports-loving consumers.
Chinese shoppers are also embracing the direct sales model that Nike sees as a major growth avenue across its geographic divisions. These sales occur either through online purchases or at Nike's owned retailing locations, and they're much more profitable for the company than its traditional warehouse sales. Thus, strong results at the international segment could lift sales growth while producing a nice bump in gross margin this quarter.
Holiday outlook and beyond
Nike's short-term forecast, issued in September, called for healthy international gains to offset a slight contraction in the U.S. market in essentially a repeat of the prior quarter's trends. That weak domestic segment would likely push gross margin lower by between 0.5% and 1%, management said at the time. But given the brighter holiday outlook that retailers like Foot Locker have announced over the last few weeks, Nike has a good shot at edging past those top- and bottom-line targets.
Looking further ahead, investors will be watching for any updates on the company's long-term forecast that predicts accelerating sales growth and rising profitability beginning in this fiscal year and carrying on at least through 2022. Nike's growth strategy relies on healthy demand trends in Asia and Latin America, along with rising e-commerce sales in the U.S., to offset a generally weak U.S. retailing segment. Those broad targets will become easier to meet with every step Nike takes toward stabilizing its domestic business.
