Nike Accelerates Growth Despite Macro Challenges

Nike (NKE 0.84%) announced fiscal first-quarter 2020 results on Tuesday after the market closed, delivering better-than-expected revenue and earnings growth even amid heightened macroeconomic uncertainty and the negative impact of tariffs. Nike also modestly raised its full-year margin guidance while reaffirming its outlook for top-line growth.

With shares of the athletic footwear and sportswear leader up more than 5% in after-hours trading in response, let's take a closer look at how it kicked off the new fiscal year.

IMAGE SOURCE: NIKE.

Nike results: The raw numbers

Data source: Nike. *For the quarter ended Aug. 31, 2019. GAAP = generally accepted accounting principles. 

What happened with Nike this quarter?

• Reported revenue growth was well above guidance provided in June, which called for an increase "in line [with] to slightly above" the roughly 4.1% growth Nike achieved last quarter.
• Revenue increased 10% on a currency-neutral basis, also above guidance for growth "squarely in the high-single-digit range."
• While we don't usually pay close attention to Wall Street's models, most analysts were expecting lower earnings of $0.70 per share on revenue closer to $10.44 billion.
• Nike Brand revenue grew 10% at constant currencies to $10.1 billion, led by strength in the Nike Direct and wholesale channels, as well as growth in footwear and apparel.
• By geography:
  • North American Nike brand revenue grew 4% to $4.293 billion.
  • Europe, Middle East, and Africa region revenue climbed 6% (12% at constant currencies) to $2.773 billion.
  • Greater China revenue grew 22% (27% at constant currencies) to $1.679 billion.
  • Asia-Pacific/Latin America revenue grew 6% (13% at constant currencies) to $1.345 billion.
• Converse revenue grew 5% (8% at constant currency) to $555 million.
• Gross margin expanded 150 basis points year over year to 45.7%, driven by higher average selling prices and improved margins at Nike Direct.
• Nike repurchased and retired 11.9 million shares this quarter for $995 million, leaving roughly $13 billion remaining under its existing share-repurchase authorization.
• In August, Nike acquired predictive retail analytics specialist Celect for an undisclosed sum.

What management had to say

"Our strong start to [fiscal-year 2020] highlighted the depth and balance of Nike's complete offense," stated Nike chairman and CEO Mark Parker. "Nike's strong product innovation, combined with our industry-leading digital experiences, continue to deepen our consumer relationships around the world."

"Our targeted strategic investments are accelerating Nike's digital transformation and extending our competitive advantage," elaborated Nike CFO Andy Campion. "Even amid the increasingly volatile macroeconomic and geopolitical environment, we expect our unrelenting focus on better serving the consumer to continue fueling strong, broad-based growth across our global portfolio."

Looking forward

With the caveat that "macro dynamics are even more volatile" today, during the subsequent conference call Campion said Nike anticipates reported revenue growth in the second quarter of fiscal 2020 to be roughly in line with the growth it just achieved in Q1, after accounting for a roughly 3-percentage-point headwind from currencies.

For the full fiscal year 2020, Nike continues to expect reported revenue growth in the high-single-digit range, slightly above the growth it saw in fiscal 2019. Trending toward the bottom line, Campion says Nike now expects gross margin this fiscal year will expand 50 to 75 basis points -- an improvement from previous guidance for an increase near the low end of that range -- assuming the negative impact of recently implemented tariffs remains in effect for the rest of this year.

All things considered, this was as strong a quarter as any investor could have hoped to see from Nike, particularly given today's increasingly difficult retail landscape. Nike stock is responding accordingly.