Nike (NYSE:NKE) just kicked off a new fiscal year that's looking every bit as impressive as the one it recently closed. The company blew past management's financial targets thanks to strong demand around the world, especially in China. Nike's earnings jumped, too, as innovative product releases plus the shift toward direct e-commerce sales pushed profit margins higher by almost 2 full percentage points.
CEO Mark Parker and his team said in a conference call with analysts this week that investors should expect more modest profitability gains ahead due to rising tariff rates and a planned increase in spending. But executives still see Nike hitting its growth targets while outperforming on earnings.
Let's take a closer look at management's biggest takeaways from the past year.
Winning with innovation
In any environment, Nike's foundation for success has always been great product.
Sales growth held steady at a 10% rate to surpass management's guidance. If executives had to boil down that success to one factor, it would be "innovation." New product launches like the React and Air Max shoe platforms delivered more than 100% of sales growth for the period, CFO Andy Campion said.
Taking different perspectives on the growth, the consumer discretionary giant noted the strength in the China market, which expanded sales at a 22% clip and now accounts for more than 15% of the global business. The e-commerce segment posted transformative growth, too, with revenue jumping 42%.
Expect more spending ahead
With Nike's unrivaled scale and resources, we will continue to capitalize on opportunities ... to invest and extend our leadership and competitive advantage. At the same time, we're also increasingly offsetting our incremental investment through the editing of resources within our legacy operating models.
Nike said investors can expect to see more aggressive spending moves like the recent acquisition of data analytics company Celect. Management sees these moves as a great way to use Nike's unique competitive advantage as the industry's biggest, most profitable player to extend its dominant position.
The good news is the company can still improve its earning power thanks to rising sales prices and cost cuts elsewhere in the business.
Better days ahead
While the geopolitical and macro environment is increasingly volatile, and in some respects unpredictable, consumer sentiment for the Nike brand remains incredibly strong and consistent around the world.
Management sees plenty of reasons to be bullish about Nike's short-term and long-term growth opportunities. These include the steady stream of innovative product releases, the development of a more direct relationship with customers through loyalty programs and online orders, and Nike's outsized opportunity in China, which has expanded at a double-digit pace in each of the last 21 quarters.
These positive trends are being offset by trade challenges and slowing economic growth in parts of the world. And Nike is directing more resources toward its supply chain, marketing, and manufacturing abilities. Finally, exchange-rate shifts are pressuring reported sales and profit gains.
Despite those issues, management raised Nike's growth outlook and predicted that sales will likely accelerate when compared to fiscal 2019. Profitability will rise a bit faster than previously stated, too, in terms of both gross and operating profit margins. Executives made it clear that they only see this improvement as a small step in their wider plans to take advantage of huge opportunities in places like China and in product niches like women's wear.