Nike (NYSE:NKE) is set to announce its fiscal 2020 first-quarter earnings results on Tuesday. Investors have high expectations for the period, given that the company significantly outpaced management's targets in 2019 and forecast another year of record results.
Against that positive backdrop, Nike also faces a few challenges, including rising tariffs, potentially slower growth in China, and increased competition from rivals like lululemon athletica (NASDAQ:LULU). Shareholders will be watching Tuesday's report for signs that the retailer has what it takes to navigate these issues without sacrificing much in growth or profitability. Here are three things to look for:
1. Sales growth trends
It's hard to overstate how well Nike's fiscal 2019 went. After adjusting for currency shifts, the consumer discretionary stock's sales jumped 11%. Key factors supporting growth included a flood of product launches and an accelerating shift toward direct-to-consumer sales. Its U.S. market steadily grew while Under Armour posted declines. Nike also enjoyed even faster gains in places like China, which jumped 24%.
Sure, that overall 11% growth rate is about half the expansion pace of Lululemon. But Nike's scale makes all the difference. The extra $4 billion in annual sales it added to its global revenue base is about the same total revenue that Lululemon is hoping to achieve through all of fiscal 2020. Nike is predicting a slight growth slowdown to around 9% this year, which would again add about $4 billion to its base.
2. Profitability updates
If Nike has felt any pressure from rising input costs or higher tariffs, it didn't show in its latest few earnings reports. In fact, gross profit margin improved by nearly a full percentage point last year. Like Lululemon, the retailer is seeing a nice earnings boost as more customers buy products directly from its digital fulfillment channel. Yet, while Lululemon already counts about 30% of the business as coming from e-commerce, Nike has more room to expand that channel and increasingly elbow retail partners like Foot Locker out of the picture.
CFO Andy Campion told investors back in June that profitability gains, like sales growth, will likely slow over the coming 12 months. Executives still aim to boost gross margin by at least half a percentage point, though. That figure is also being held back by a temporary surge in spending on the supply chain. The expected rollback of those investment needs in future years helps explain why it is predicting many more years of profitability gains.
3. Forecasts for what lies ahead
Nike's initial reading of fiscal 2020 is positive, as it forecasts a continuation of the positive momentum that investors have seen over the last two years. But CEO Mark Parker and his team might issue significant updates to sales and profit targets on Tuesday to account for the latest demand trends. Executives in the early summer listed a few major issues that could threaten their outlook, including trade tensions, geopolitical volatility in places like the U.K. and Latin America, and exchange rate swings.
Still, for the most likely scenario for success, Nike cited last year in China, where growth soared by 24% to add an extra $1 billion of annual revenue thanks to strong demand for new products and a surge toward direct-to-consumer sales. If those trends play out to varying degrees in its other key geographies, then Nike should have no trouble notching another record year in 2020.