Nike's (NKE 3.14%) fourth-quarter earnings report showed that the athletic wear giant may be turning things around after a rough fiscal year in which its main rival -- Adidas -- continued to post double-digit growth on Nike's home turf of North America. Meanwhile, Nike's growth was slowing down into the single digits, indicating that it was losing market share.
The company appears to be fighting back, with North American revenue accelerating in the fourth quarter, based on strong results from new products and digital sales.
Here are three signs Nike is back on the offensive.
The new Nike React Flyknit running shoe has been a strong seller. Image source: Nike.com.
1. New shoe styles are scoring big
Management has talked a lot about improving the design process over the last year in order to ramp up its innovation efforts. This is a must, given what Adidas has accomplished. Nike has to be able to keep innovating in footwear, because the business contributes about two-thirds of annual revenue.
In the fourth quarter, footwear revenue grew 8% year over year (adjusted for currency changes), which reflects strong demand for new shoe styles.
CEO Mark Parker cited the recent success of the Nike React and Air Max shoe lines for this improvement. He said that React and Air Max are successfully transitioning into platforms that "are scaling multiple styles and across categories." He added that "they're driving extraordinary growth and brand heat with customers."
The React, launched in the third quarter, has been very well received in the marketplace. So far, it's the No. 2 running shoe above $125, just behind Nike's Air VaporMax.
Parker also commented on Nike's success in releasing new shoe styles designed for everyday wear. He said the March launch of the Air Max 270 was the most successful Air Max launch in Nike's history.
Additionally, management reported that the Jordan brand is back to a "pull" market in North America, meaning that customers are actively searching for a particular product, and the company is in the position of having to fill orders to meet strong demand.
Nike expects the brand to return to growth in fiscal 2019. Parker said the company "nearly tripled the size of Jordan's women's sneaker business." Also during the fourth quarter, Jordan apparel was up double digits in all geographies, and up 50% in China.
2. Online business is booming
Nike is continuing to drive more growth through its direct sales channels, particularly online, with digital revenue growing 41% in the fourth quarter.
The digital business drove over 90% of the company's growth in the quarter. This is way above management's expectation that e-commerce would drive more than 50% of total revenue growth over the next five years.
Developing its digital business is a high priority for Nike. With more customer interaction happening digitally, Nike can gather better data and analytics to more accurately predict demand and manage inventory accordingly, which would clearly help expand margins over the long term.
CFO Andy Campion indicated there could be an acceleration in digital growth in the coming quarters: "Our supply was only a fraction of the actual demand we experienced. This underscores a significant opportunity to better sense ... and serve digital demand in fiscal 2019."
3. Higher demand is firming up margins
Nike's gross margin had been steadily declining over the last few years, peaking at 46.2% in fiscal 2016. Some of this decline had to do with higher product costs, which management has been actively working to reduce through better manufacturing efficiency.
In the fourth quarter, gross margin ticked up to 44.7%, a small improvement over the year-ago 44.1% margin, but a big jump sequentially from the 43.8% margin in the third quarter. Management attributed this to higher full-price sales, in addition to digital growth.
Management expects gross margin to expand another 50 basis points in fiscal 2019, as Nike is experiencing stronger demand globally across footwear and apparel.
Fiscal 2019 could be even better
Overall, Nike saw a slight acceleration in North America (its most saturated market) with growth of 3% on a currency-neutral basis compared to just 1% in the quarter ending May 2017. Parker called this a return to "healthy, sustainable growth" in this region.
It could get even better in the year ahead as Nike is not done squeezing more efficiency out of its supply chain, not to mention the ongoing development of its digital capabilities.
