Nike Leaves Its North American Woes in the Dust

Nike Inc. (NKE 0.24%) announced solid fiscal third-quarter 2018 results on Thursday after the market closed, with modest top- and bottom-line increases driven by double-digit international growth and the continued strength of Nike's direct-to-consumer sales.

Perhaps most exciting, Nike also predicted an impending turnaround for its lagging North American business. So let's tighten our laces and get a closer look at what Nike had to say.

Image source: Nike.

Nike results: The raw numbers

Data source: Nike, Inc.

What happened with Nike this quarter?

• Nike's GAAP results included a $1.25-per-share negative impact from a provisional tax expense related to the enactment of the 2017 Tax Cuts and Jobs Act. Adjusted for that one-time item, Nike's net income would have arrived at $0.68 per share -- well above most investors' expectations for $0.53 per share.
• Revenue was also above Nike's approximate guidance provided in late December, which called for sales growth to be at, or slightly below, the 4.6% year-over-year increase it achieved last quarter.
• NIKE Brand revenue increased 4% at constant currencies, to $8.5 billion, driven by double-digit percent growth in international NIKE Direct sales, as well as strength in Sportswear and NIKE Basketball.
• By geography, NIKE Brand sales fell 6% in North America to $3.571 billion, but increased 19% in the EMEA (Europe, Middle East, and Africa) region to $2.299 billion, grew 24% in Greater China to $1.336 billion, and climbed 13% in the APLA (Asia Pacific and Latin America) region to $1.268 billion.
• Converse revenue declined 3% (8% at constant currency) to $483 million, primarily as Nike rebalanced the brand's marketplace supply in North America.
• Gross margin contracted 70 basis points year over year -- well above guidance for a contraction of 125 to 175 basis points -- as new product launches and stronger sell-through were offset by a 90-basis-point foreign exchange headwind.
• Repurchased 14.6 million shares for $962 million during the quarter, leaving roughly $4.8 billion remaining under Nike's four-year, $12 billion buyback authorization that was initiated in November 2015.

What management had to say

"NIKE's Consumer Direct Offense drove strong double-digit growth across our international geographies, led by Greater China," stated Nike chairman and CEO Mark Parker. "As we close Q3, we now see a significant reversal of trend in North America, as momentum accelerates through the scaling of new innovation platforms and differentiated NIKE Consumer Experiences expand across the marketplace."

During the subsequent conference call, Parker elaborated that the company is enjoying momentum in all four core geographies, thanks largely to its ability to get "the right product in front of the consumer in the right moment."

"It's becoming increasingly clear that the closer we connect our strong brand to consumers in the marketplace, the greater the returns," he added.

Looking forward

For the current fiscal fourth quarter, Nike predicts that North American revenue should be roughly flat on a year-over-year basis before returning to growth in the first half of fiscal year 2019.

As such, Nike expects fiscal Q4 reported revenue growth in the high-single-digit percent range, driven by continued strength from international markets. Nike also anticipates fiscal Q4 gross margin will be flat to "very slightly up" as compared to the same year-ago period.

Looking further ahead -- and with the caveat that its planning still isn't finalized -- Nike expects full fiscal-year 2019 reported revenue growth in the mid- to high-single-digit range, assuming continued international momentum and the return to growth in North America.

In the end, there was little not to love about this report, particularly as it eases investors' concerns over the extended under-performance by Nike's core North American business. And it should be no surprise to see Nike stock hovering near its all-time high as of this writing in response.