Investors found reasons to react negatively to Nike's (NKE 4.35%) latest earnings report, but nothing in that announcement knocked the company from its positive growth trajectory. Sales continued to expand at a robust pace even as profitability inched higher. These trends help put into perspective the fact that revenue growth slowed in the North American market after three quarters of acceleration.
In a conference call with analysts, CEO Mark Parker and his team added additional context on Nike's operating trends, and why they think these factors position the sports apparel titan for a strong finish to fiscal 2019.
Below are a few highlights from that call.
Checking all the boxes
Our growth reflects double-digit currency-neutral momentum internationally and high-single-digit growth in North America. Gross margin expanded by 130 basis points in Q3 as average gross selling prices expanded, strong demand drove higher full-price sales, and higher-margin [direct-to-consumer] growth outpaced wholesale growth.
-- CFO Andy Campion
Nike hit all the right notes in the quarter, with healthy global demand culminating in an 11% sales increase after adjusting for foreign exchange swings. Rival Under Armour, in contrast, boosted revenue by just 3%. There were pockets of relative weakness, to be sure. Notably, Nike's North American sales gains slowed to 7% after accelerating in each of the last three quarters. Given strong sales volumes and pricing, executives saw the drop as just part of normal volatility rather than an indication of softening demand. The company's global apparel division rose by 10% and trailed the 13% spike in footwear. The clothing segment had grown 13% over the prior six months.
Still, Nike's overall results reflect healthy demand, rising prices, and booming digital growth -- just as executives have been targeting since late 2017.
The secret sauce
New innovation platforms comprised the vast majority of our incremental revenue growth.
Nike was correct back in 2017 when it predicted that product innovations would drive most of its growth in the coming years. But executives underestimated the power of that pipeline. Rather than delivering a bit more than half of the gains, the company has said fresh launches have been responsible for about 80% of growth in recent quarters.
That trend held in the latest period, executives said, with good results from new platforms like the Vapormax sneaker, which is one of its most popular products and retails for up to $200. The good news is that this success gives Nike a clear path toward continuing to make market share gains. It also provides support for the management team to keep their foot on the accelerator with respect to innovative launches across its footwear and apparel categories.
In the early innings
Overall, we expect to deliver high-single-digit revenue growth as well as gross margin expansion [in fiscal 2020] and profitability in line with the long-term financial model we communicated at our Investor Day in October 2017.
Nike's growth outlook indicates that management expects to continue boosting sales and modestly expanding profitability in the final quarter of fiscal 2019 and throughout 2020. The short-term earnings forecast isn't especially strong since the fiscal fourth quarter will include elevated spending on the supply chain and on growth initiatives, in addition to foreign currency pressures. Yet for the closing of 2019, and for all of 2020, Parker and his team believe they'll achieve or surpass their aggressive annual sales and profit targets of around 8% revenue growth and rising gross profit margin.
The slowdown in the North American region might keep investor attention on that geography over the next few quarters, but key metrics like inventory, pricing, and digital sales all support an optimistic reading of Nike's broader business trends.
Management will issue a more detailed assessment after the close of the fourth quarter. As of now, though, there's every reason to expect the footwear giant to notch a third straight year of robust growth in fiscal 2020.