Nike Earnings: What to Watch

The sneaker giant's performance has been improving, and there are solid reasons to expect the positive trends continued in its fiscal third quarter.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Mar 16, 2019 at 10:02AM
Consumer Goods

Nike (NYSE:NKE) is riding surging investor enthusiasm heading into its upcoming earnings report, with its share price far outpacing the broader market's gains over the past year. The sports apparel and footwear giant wowed Wall Street in its last few reports, and capped its run with a sharp sales growth acceleration in its fiscal second quarter.

Below, we'll take a look at the biggest trends that might determine whether Nike's rally extends deeper into 2019.

Four friends playing basketball outdoors.

Image source: Getty Images.

Market share

Revenue grew by 10% during the first half of Nike's fiscal 2019, but below that top-line figure, there are even more encouraging data points. Sales growth in the U.S. accelerated to 9% last quarter from 6% in the prior quarter and 3% at the end of the 2018 fiscal year. Indications are that the company likely continued to build on that impressive momentum during the past few months.

Foot Locker management recently credited new Nike products for helping the retailer outperform its guidance forecast during the holiday season. Rival Under Armour edged past its prediction, too. Given those results, and strength in the wider industry, Nike investors have good reason to believe the market leader will meet or exceed its global growth target of around 9% this fiscal year.

Check out the latest earnings call transcript for Nike.

Profitability

Nike's profit margins have been rising thanks to a combination of several positive trends. First, the company has flooded the market with new releases across popular footwear platforms like Jordan, Nike, and Air Max. These launches have been responsible for close to 80% of sales growth, according to executives. Second, Nike's digital business, which delivers about twice the profitability of its sales through retailers, is booming. Growth in its online direct-to-consumer sales surpassed 40% last quarter, which helped convince CEO Mark Parker and his team to lift their long-term outlook for that segment.

But inventory levels are probably the best indicator of short-term profitability right now, and the news is positive on that score too. Nike entered the quarter with lean holdings, which means it likely didn't feel much pressure to cut prices, and could also present a product mix featuring a high proportion of its newest, most in-demand items to customers and retailers. Altogether, executives are aiming to boost gross profit margin by about 0.7 percentage points this year, but the results could exceed that – as they did last quarter – if selling conditions keep improving.

Leading the pack

Management hasn't been shy about pouring cash into areas -- like the digital sales channel -- that they see as having promising growth outlooks. "We believe that Nike's unrivaled scale and resources afford us the ability to overindex investment in these differentiating capabilities," CFO Andy Campion said back in September. By building out a powerful direct-to-consumer infrastructure, for example, or spending nearly $1 billion on marketing and advertising brand support in just the fiscal second quarter, the company can further cement its leadership position.

But Nike isn't settling for just defending its current niches. It's targeting a long list of complementary growth areas, including key markets like China and important niches at home such as women's athletic wear and men's yoga apparel. Recently, the company has managed to boost its profitability while directing lots of resources toward expanding its footprint. That's a formula for continued healthy shareholder gains if Nike can keep it up.