Nike (NYSE:NKE) is set to kick off its fiscal 2019 year with a first-quarter earnings announcement on Tuesday, Sept. 25. The sports apparel titan's stock hit new highs following its last announcement, which showed broadly improving demand and healthy profitability trends.
But can Nike keep the momentum going as it prepares for the critical holiday shopping season? Let's take a closer look.
Growth in China and the U.S.
Nike is a global business, but investors today are mainly concerned about its growth trends in two key markets: the U.S. and China. In the U.S., sales finally returned to positive territory last quarter, inching higher by 3% after nearly two years of disappointing results. Shareholders will want to see more evidence of healthy demand on Tuesday. Expectations are elevated on this point, given Nike's surprisingly strong sales boost last quarter and the robust pipeline of new product introductions.
As for China, the segment expanded at twice the rate of any of Nike's other geographies last quarter, logging a 35% sales spike. Results in this division are important for a few reasons. First, executives expect the market to eventually grow to many times the size of the U.S. market. Second, the segment is already heavily tilted toward direct-to-consumer sales and so its rising profitability could be a preview of Nike's broader business trends as it shifts toward a more direct selling model around the world.
During its investor day meeting last year, Nike executives predicted that about half of its sales gains in the coming years would come from newly introduced products. The company easily outperformed that goal last quarter, as about 80% its growth was powered by innovations in platforms like Air VaporMax and React.
Nike's entire business performs better when innovation leads the way. But investors can see some of the clearest benefits impacting profitability.
Keep an eye on gross profit margin to see whether it continues to rebound as it did last quarter. The stable pace of product releases should help on that score, and so should rising direct-to-consumer sales, which are about twice as profitable as the ones that Nike makes through its network of retailers.
Nike's outlook for fiscal 2019 reflected rising optimism on the part of CEO Mark Parker and his team. They predicted back in late June that sales would rise in the high-single-digit range as gross profit margin ticked up by 50 basis points. Both of those metrics would mark solid improvements over fiscal 2018.
At the time, Nike cited a few metrics that supported the outlook upgrade, including healthy demand for new product launches, a better inventory position in the U.S. market, and a shift toward digital sales at higher prices.
Digging a bit deeper into the forecast, Nike predicted relatively weaker profit results in the first half of the year as it spends aggressively around marketing for events like the World Cup. We'll find out on Tuesday whether management still thinks gross profit margin gains will accelerate starting in the holiday shopping season, even as Nike's latest product launches power what could be its strongest sales spike in years.