When Nike (NKE 1.97%) released strong fiscal fourth-quarter 2019 results last Thursday after the markets closed, investors' initial reaction to the news was surprisingly muted. Shares of the athletic footwear and sportswear leader traded roughly flat on Friday, then bounced a modest 2.7% on Monday -- but only as traders hailed the prospect of easing macroeconomic tensions after the U.S. and China agreed to restart trade talks over the weekend.
Now that the dust on Nike's quarterly update has settled, it's a great time to take a closer look at what management had to say during its call with analysts.
IMAGE SOURCE: GETTY IMAGES.
1. On managing macroeconomic headwinds
Where geopolitical dynamics have led to trade tensions and foreign exchange volatility. We're certainly mindful of the risks and more importantly we're in command of the conditions that are under our control. And that's serving the consumer and managing the levers we have delivering great product, engaging experiences and building our brand.
-- Nike Chairman and CEO Mark Parker
Macroeconomic issues were obviously on investors' minds going into the report, so it's no surprise Parker took some time to address the concerns. Some of those issues are largely outside of Nike's control: Foreign-currency exchange, for example, presented a 6 percentage-point headwind to revenue growth despite Nike's hedging program, reducing Nike's top-line growth from around 10% at constant currencies to 4.1%, as reported.
One thing is certain, however: Currency-exchange and macro headwinds won't persist forever. And as long as Nike focuses on strengthening the parts of its business within its control, it will emerge stronger over the long term.
2. On accelerating growth in the women's business
One question I get asked a lot is how we plan to accelerate the growth in our women's business. In addition to the right product and inspirational brand experiences, the major unlock we see over the next several years is the opportunity that digital provides. Distribution is often one of our biggest barriers and we continue to find that when we present product in a more future forward way, we're able to take the female consumer someplace new and they're responding. Our women's business in NIKE Direct and through our digital platforms continues to outpace our performance in the wholesale channels. Digital and where digital meets physical will be tremendous sources of growth in women's moving forward.
-- Mark Parker
Nike is already achieving enviable growth from within its women's business. Nike Women's wholesale segment revenue climbed 11% at constant currency for the full fiscal year, to $7.38 billion -- but still represented just under 23% of its total sales -- and accelerated that growth into the second half of the year to handily outperform the broader wholesale business. Over the longer term, Nike sees women's product sales comprising at least half its total.
3. One surprising source of digital growth
The NIKE app our most comprehensive one-stop-shop for NIKE product is quickly expanding, with triple-digit revenue growth in Q4. And in the first half of fiscal year '20, we will launch the NIKE app in China and in 13 new markets in EMEA [Europe, the Middle East, and Africa]. This will be an incredible addition to our business through a potential pool of hundreds of millions of new members. The digital opportunity alone is tremendous but just as promising is how digital and physical environments are intersecting and amplifying each other. Our most effective test case thus far has been the NIKE App at Retail, which links features of the NIKE app to our physical retail experiences.
-- Mark Parker
Parker elaborated that NIKE app users tend to check in far more often than shoppers at its other digital channels, which explains its outsize revenue growth as the company begins to more effectively monetize this budding channel. And that doesn't include the momentum of Nike's separate Sneaker app, which accelerated its revenue more than tenfold, from $70 million in fiscal 2016 to more than $750 million this last fiscal year. As Nike begins the global rollout of the NIKE app to more than a dozen new countries including China in the coming quarters, it could offer an incredible source of incremental growth.
4. On fueling massive growth in China
This marks the 20th consecutive quarter of double-digit growth in China. Growth was broad-based across men's and women's, performance in sportswear and led by Digital. NIKE Digital grew 37% in Q4, fueled by the Sneakers app and the strength of NIKE-branded experiences with partners such as team on WeChat. For the full year, revenue in Greater China increased 24% on a currency-neutral basis. On a reported basis, FY '19 revenue was up 21%. We see continued strong growth in China, in fiscal year '20 as a brand of China, for China, we are building deep and meaningful relationships with the Chinese consumer. We are investing in our local team and talent creating products specifically designed for the Chinese consumer, sponsoring China's top athletes, federations and teams and working closely with the ministries of Sport and Education to fuel the passion for an increasing participation in sport and fitness in China.
-- Nike CFO Andy Campion
To be fair, Nike's Greater China revenue growth arrived at 22% at constant currencies in the fiscal fourth quarter, decelerating slightly from its full-year growth of 24%. That doesn't necessarily indicate a longer-term trend just yet, however, and Nike anticipates continued market-share gains as it builds its brand in the Middle Kingdom for the foreseeable future.
5. Looking forward
In Q1, we expect reported revenue growth in-line to slightly above our reported revenue growth in Q4. We expect currency-neutral revenue growth squarely within the high-single digit range, offset by 4 points of FX headwinds. Based on current FX rates, the FX impact on revenue should largely abate from Q2 forward. [...] As for gross margin, we expect to deliver flat to potentially 25 basis points of gross margin expansion in Q1. This reflects very strong underlying margin expansion fueled by NIKE Direct growth and strong full price sales.
-- Andy Campion
For perspective, this quarterly guidance offered no surprises relative to Wall Street's expectations -- though it's encouraging to know foreign-exchange headwinds should abate as the year progresses. In the meantime, Campion added that foreign exchange will present a 50 to 70 basis-point headwind to gross margin in the first quarter, albeit largely driven by exchange rate changes compared to last year's fiscal Q1, as well as the timing of gains and losses from its hedging program. As such, Nike reaffirmed the preliminary full fiscal-year 2020 guidance it first provided in March, which calls for high-single-digit reported revenue growth and gross margin expanding around 50 basis points from fiscal 2019.
While the market's initial response may not indicate as much, that should have been more than enough to appease investors' concerns over the state of Nike's business and the sustainability of its growth in today's difficult retail environment.
