It took a while, but Nike (NKE 6.68%) is finally getting its groove back. In its recent earnings report, the sports apparel titan announced accelerating sales growth in the core U.S. market while a flood of innovative product releases also lifted profitability. Executives announced that both the top- and bottom-line results edged past their expectations.
CEO Mark Parker and his team went into far more detail about the latest operating trends when they held a conference call with Wall Street analysts. Below are a few key takeaways for investors from that presentation.
Last quarter, we described the growing momentum in our business. In Q1, that momentum continued at a strong pace. -- Parker
No one can predict the future, and Wall Street pros (sometimes) understand that fact. However, investors still tend to reward companies that issue aggressive business outlooks -- and then manage to beat those optimistic targets.
That's what happened here. Nike said back in June that demand trends implied accelerating growth in the U.S. market, and those gains materialized as sales sped up to a 6% rate from 3%. Profitability rose a bit faster than expected, too, thanks mainly to an influx of innovative product releases across its footwear and apparel portfolio.
Adapting to changing tastes
While Nike Digital is leading the way, we believe physical retail will also play an important role in doubling our direct connection to consumers. We see growth in the physical environment being driven by smarter retail, experiences that leverage digital technology to better serve consumers. -- CFO Andy Campion
Nike's direct digital sales channel was its fastest-growing segment in each of its geographies, rising 36% overall during the quarter. Management has long-term plans to continue supporting this division, including through costly enhancements to the supply chain, digital marketing, and the mobile app.
Executives believe there's a bright future ahead for the physical shopping environment, too, but Nike's focus will be on delivering unique customer experiences either through its own stores, or through partnerships like its Foot Locker relationship.
It's good to be the king
As our long-term financial model implies, we believe that Nike's unrivaled scale and resources afford us the ability to over index on investment in these differentiating capabilities, while still delivering expanding profitability over the five-year horizon. -- Campion
One of the biggest advantages Nike has over rivals is the massive pool of resources it can direct toward advertising and marketing. The company spent $3.6 billion on these categories last year, which is comparable to Under Armour's entire sales result in the core U.S. market. It shelled out almost $1 billion last quarter alone, mainly on the World Cup event.
Nike is aiming to extend that spending advantage to the digital sales channel over the next few years, and some of the expensive projects it's working on include digital demand sensing, data analytics, digital product design and production, and a new resource planning backbone that should help it quickly create, market, and deliver its footwear and apparel products.
Executives believe they can pour cash into these initiatives while still meeting their broader financial goals of boosting profitability and improving return on invested capital through 2022. In the meantime, Nike appears primed to achieve the first part of that long-term plan, with sales speeding up in fiscal 2019 and gross margin on track for its first increase in three years.