When Nike (NKE -0.74%) released better-than-expected fiscal second-quarter 2020 results late Tuesday, shares of the footwear and sportswear company understandably rallied in response. Revenue climbed 7.2% year over year to $10.66 billion, trouncing both Nike's guidance and estimates for growth closer to last quarter's 4.1%. Net income soared more than 28% to $0.86 per share, also smashing expectations for earnings closer to $0.70 per share.
To better understand what's driving Nike's relative outperformance, let's dig into several key points management discussed during yesterday's subsequent conference call with analysts.
Basketball player Zion Williamson. IMAGE SOURCE: NIKE.
On Nike's broad-based strength
It was a quarter that proved the depth and balance of our complete offense, building on the strengths of our foundational business drivers and capitalizing on the untapped dimensions of our portfolio. For the quarter, this is reflected in the broad-based growth in all geographies, led by our international business, which grew 16%; double-digit growth in our women's business off the back of an incredible summer of celebrating female athletes; in both footwear and apparel, with our strong lineup of innovation and style, which continues to feed the growing consumer demand for comfortable athletic product; and in digital, which grew a very strong 42%, showing the power of more personal relationships with the consumer. Mobile continues to lead the way, and within mobile, app experiences are fueling the most growth.
-- Nike Chairman and CEO Mark Parker
Apart from the macroeconomic challenges that held back its reported revenue growth -- Nike brand sales climbed 10% at constant currency (more on that below) -- there were arguably no weak spots for bearish investors to prod in this quarter's report. The company truly is firing on all cylinders, from its previously troublesome North American market (where sales climbed 4%) to its burgeoning women's business and incredible momentum driving sales through digital channels. Speaking of which...
Digital momentum is key
Digital is transforming and amplifying everything we do at Nike. In Q1, Nike Digital grew 42% on a currency neutral basis, driven by enhanced digital services and the expansion of our app ecosystem internationally. The Nike app and SNKRS app are now both live in over 20 countries, with more expansion coming over the balance of fiscal year '20.
-- Nike CFO Andy Campion
More specifically, Campion elaborated later in the call that the Nike app is now live in 21 countries and will go live in China over the holidays (where overall Nike brand sales coincidentally achieved their 21st straight quarter of double-digit growth). And the SNKRS app is already live in the same 22 countries, he says, "with more room to grow" in the Europe, Middle East, and Africa (EMEA) region while driving more than 50% growth in the Asia-Pacific/Latin America geography this quarter.
Celect massively accelerates that momentum
Celect's team and proprietary demand-sensing tools will help us more effectively predict demand, plan supply, allocate product to the right stores, and sharpen our pricing and markdown cadence. Celect's capabilities are first of their kind in our industry. Most other industries sell the same product season after season. Celect has developed unique models that leverage data science and machine learning in our industry where we bring new and innovative product to market every season. The acquisition of Celect accelerates our building of digital demand-sensing capabilities by at least three years.
-- Campion
One of the biggest challenges for any retail-centric brand is finding ways to effectively maintain fresh, seasonal inventory without boring consumers in the process. And make no mistake, it's a bold statement to say Celect's cutting-edge artificial intelligence solutions will accelerate Nike's already enviable digital-inventory management leadership by years. If this proves true, it should only make it that much more difficult to disrupt Nike's ability to drive steady global growth no matter what conditions it faces.
Nike's latest in tariff-mitigation efforts
In relation to tariffs, we've been clear that we strongly believe in the power of free and fair trade. Historically, we've effectively navigated through excessive duties, and we're confident that we'll continue to do so under the current dynamic. In China specifically, we continue to extend Nike's lead. In our key cities of Beijing and Shanghai, we serve a generation of digital-first consumers and we support their love of sport by helping to grow participation through grassroots programs. As I said before, Nike is a brand of China, for China, and the results continue to prove it out. We've driven double-digit growth in Greater China every quarter for more than five years. This quarter, we continued that momentum with an outstanding 27% revenue growth on a currency-neutral basis.
-- Parker
For perspective, earlier this year Nike joined over 200 other footwear companies urging President Trump not to increase tariffs on footwear imported from China, with the group calling the move "catastrophic for our consumers, our companies, and the American economy as a whole."
While those tariffs are certainly hurting many of the smaller players in the footwear industry, Nike has so far proven capable of effectively mitigating the added expense thanks to its momentum and enormous global scale.
Guidance is (even) stronger than you think
Our projected currency-neutral growth and profitability are improving. One might have expected the recently implemented tariffs and associated FX headwinds to result in lower real-dollar expectations. However, our real-dollar outlook remains consistent to slightly improved, net of all of the dynamics in our business. For the full year, we continue to expect reported revenue growth within the high-single-digit range slightly exceeding FY19 reported revenue growth. This incorporates our improved currency-neutral outlook being largely offset by the more intense FX headwinds of late associated with trade dynamics.
-- Campion
Finally, Nike may have reaffirmed its outlook for high-single-digit percent growth for all of this fiscal year. But Campion made it clear Nike's top-line guidance would have been even stronger had it not been for broader macroeconomic challenges -- which are manifesting through tariffs and foreign-exchange rates -- that are essentially masking its true strength. That said, Nike did positively revise its outlook for full-year gross margin to expand by 50 to 75 basis points (up from its prior target near the bottom end of that range), driven by better-than-planned growth in its higher-margin NIKE Direct channels and international geographies.
