Shares of Nike (NKE -1.81%) are trading at record-high levels after the company posted fiscal-2020 first-quarter results that topped analysts' high expectations. This has prompted several on the Street to upwardly revise their price targets on the world's leading footwear and apparel company. Revenue rose 7% to $10.7 billion, earnings of $1.4 billion were up 28% over the same period a year ago, and diluted earnings per share of $0.86 far outran the $0.71 analysts had expected.
Nike is starting out its new fiscal year on the right foot, with these stellar results marking the sixth straight quarter of at least 6% sales growth and 50 basis points of gross margin expansion. Despite the ongoing presence of U.S.-China tariff headwinds, management maintained its fiscal-year 2020 guidance and increased its forecast for gross margins.
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A jump in China sales propels results
The strong operating results were driven by an acceleration in sales in the greater China region. Nike's sales in China soared 27% in the first quarter as consumers there snatched up footwear, apparel, sports equipment, and accessories like they were going out of style. The footwear business alone hauled in $1.2 billion, accounting for most of the Chinese revenues.
These results are an encouraging sign for Nike as it heads into fiscal 2020 riding high on record 2019 results, which included 11% sales growth on a currency-neutral basis and gross margin expansion of 90 basis points. Despite signs of slowing growth in China, the world's second-largest economy, Nike's strength there demonstrates that consumer demand for athletic footwear and apparel is robust. China represented a quarter of Nike's incremental sales growth last year, and it appears poised to be a strong contributor again this year.
Playing offense for the win
As the company responds to changing customer purchasing trends, e-commerce continues to be a major growth driver. Its "Consumer Direct Offense," designed to bring new products to Nike's loyal customer base more quickly through the brand's own flagship stores, its website, and other online retailers, is driving strong performance globally. The company is making the right product available at the right time by establishing a direct connection with consumers. Along with improvements in its supply chain, this has helped drive rising margins.
On the first-quarter earnings call, CFO Andy Campion commented, "Since launching our Consumer Direct Offense two years ago, our currency-neutral performance has exceeded our long-term financial model in terms of growth, profitability, and returns on invested capital. And we see that momentum continuing over the balance of fiscal 2020."
Nike's digital division is gaining momentum, and the Nike app is seeing strong adoption as consumers sprint to the company's differentiated retail experience. As part of its "Triple Double" strategy, the company is doubling the resources spent on its digital properties and deepening one-to-one consumer connections. This is resonating well with millennials, who want more relevant, personalized products as fast as possible.
Innovation produces a solid pipeline
What's setting Nike apart from its rivals is product innovation. Technical savvy is a strong asset for the company; for example, the Adapt basketball shoes, which use adaptable lacing technology that electronically adjusts the lacing, pressure, and fit of the shoe to the contours of the consumer's foot, has sold out on Nike's Snkrs website. As the future of athletic footwear, the technology has the potential to drive widespread growth across Nike's portfolio for years to come.
Innovative technology-driven products delivered to an increasingly digital consumer are driving the higher selling prices and margins behind Nike's growth and expanding market. Nike's House of Innovation stores, in New York City and Shanghai, have a Sneaker Lab that offers digitally enabled design and personalized service for customers to make their personalized shoes.
Women's footwear and apparel is another key area of future growth at Nike, and this division continued to experience solid growth in the first quarter on the strength of a successful summer season that celebrated famous female athletes and Women's World Cup promotional activity. Nike's lineup of innovative, stylish products is "feeding the growing consumer demand for comfortable, athletic products" among women, according to CEO Mark Parker.
Can the earnings beats go on?
Going forward, Nike still has the potential to be one of the best growth stories in the consumer discretionary sector. It appears to have the growth drivers in place to deliver another year of outperformance and market-share gains despite an environment of heightened macroeconomic uncertainty. Nike is poised to build on its dominant position in the athletic apparel and footwear market through its globally recognized brand, digital expansion, innovative products, and growth in emerging markets such as China.
Nike is heading into the peak holiday shopping season with the wind at its back. The stock is trading for about 28 times forward earnings as big expectations have become even bigger. But given its market dominance and growth metrics, the premium valuation relative to footwear and apparel peers like Skechers USA (SKX -0.31%), Ralph Lauren (RL -0.79%), and VF Corp. (VFC -1.73%) seems warranted. Current shareholders should tighten their laces and enjoy Nike's run, while prospective buyers may wish to wait for a macro-driven pullback to get in the game.
