Please ensure Javascript is enabled for purposes of website accessibility

5 Ways Nike's Business Just Got Stronger

By Demitri Kalogeropoulos – Updated Apr 15, 2019 at 3:18PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Another quarter, another round of improvements in many of Nike's key operating metrics.

Nike (NKE -12.81%) posted fiscal third-quarter earnings results last week, and most investor attention went straight to the company's decelerating sales growth outlook. The sports apparel and footwear titan saw its expansion pace fall in the key U.S. market after accelerating for three consecutive quarters. Investors reacted by sending shares lower following the report.

There's nothing in the earnings announcement that should worry long-term investors, though, as the business made impressive improvements in areas like market share, profitability, and branding.

A jogger laces up.

Image source: Getty Images.

Better products

Nike refers to its innovation efforts of developing, manufacturing, and releasing industry-leading footwear and apparel, as creating "brand heat." There's ample evidence that the retailer remains on top with this strategy.

Standout franchises this quarter included Nike Air platforms like Air Max and VaporMax. Releases here helped the footwear segment grow at a double-digit pace across its sales geographies.

More profitable

Profitability gains edged past management's forecast, with gross profit margin improving to 45.1% of sales from 43.8% a year ago. Over the past nine months, the metric is up by roughly a full percentage point as higher selling prices are only partially offset by increased costs on inputs like cotton.

$1 billion of digital sales

Digital sales gains slowed slightly but remained robust at 36% compared to 41% last quarter. That boost was enough to achieve Nike's first billion-dollar e-commerce sales quarter, but there should be many more of those on they way. CEO Mark Parker and his team believe that selling channel will eventually account for significantly more than 30% of the business.

Check out the latest earnings call transcript for Nike.

A deeper moat 

Nike invested $865 million on branding and marketing for its products. It also shelled out more cash on long-term growth initiatives and an improved supply chain.

That level of support would be hard enough for rivals like Under Armour to even approach, and Nike plans to keep raising that bar. With pre-tax income rising 14% in the past nine months, management has plenty of firepower it can direct toward that moat-strengthening goal of pouring resources into competitive assets like branding and the online sales channel.

Inventory management

Inventory inched higher by 1% to significantly trail sales growth. That gap puts Nike in a great position to continue flooding the market with just the most in-demand, high-margin products in the fiscal year's closing months.

Thus, it was no surprise that management is still bullish about their operating outlook over both the short and long term. "We expect our strong pipeline of innovative products, and an acceleration in the creation of new digitally led consumer experiences to continue driving healthy growth in [the U.S.] going forward," CFO Andy Campion told investors in a conference call with analysts.

Stepping further back, management predicts high-single-digit sales growth in the fiscal fourth quarter, which will come on top of the prior year's 8% spike. Gross profit margin is again expected to inch higher thanks mainly to strong global demand and lean inventory. Pressures on earnings include rising input costs, unfavorable foreign currency moves, and elevated spending plans. There's also the ever-present uncertainty around economic growth in key areas like the U.S. and China.

All that said, Nike sees no reason to believe it won't meet its goal of high-single-digit sales growth and rising profitability in fiscal 2020.

Demitrios Kalogeropoulos owns shares of Nike, UAA, and UA. The Motley Fool owns shares of and recommends Nike, UAA, and UA. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$83.12 (-12.81%) $-12.21
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UAA
$6.65 (-9.77%) $0.72
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UA
$5.96 (-8.31%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.