Nike (NYSE:NKE) investors were optimistic heading into the company's fiscal second-quarter earnings report, given the strong results so far this year. It turns out that those high expectations were justified. The latest quarterly update, which included the start to the all-important holiday season, showed that Nike's business is firing on all cylinders, both in its home market and in key international geographies like China and Europe.
Let's take a closer look.
Innovation is working
Nike's growth momentum showed no signs of weakness. The core U.S. segment expanded at a faster rate than in the prior quarter, in fact, with an 8% jump in footwear sales helping drive 5% overall revenue growth.
China continued to kick in huge numbers, with revenue rising by over $300 million year over year, or 23% after accounting for currency exchange shifts. On a currency-neutral basis, Nike grew globally at a 13% rate compared with 10% last quarter. "Nike has proven again that innovation is our greatest competitive edge," Mark Parker said in his last earnings report as CEO.
"Nike delivered another strong quarter of accelerating, high-quality growth," CFO Andy Campion added, "driven by strategic and targeted investment in our digital transformation."
That digital boost included a 38% sales increase overall, and a 70% spike in the U.S. during Black Friday, executives said.
That head-turning growth was amplified by strong finances. Nike managed a slight uptick in gross profit margin as higher prices and cost cuts offset tariff increases. Selling expenses fell, too, which allowed before-tax earnings to jump 25% to $1.25 billion. The retailer spent more cash investing in the direct-to-consumer segment at home, which depressed earnings there. But double-digit growth in every other geography more than offset that sluggishness.
Meanwhile, Nike's lower tax rate and declining share count pushed the 25% operating income boost up to 35% on a per-share basis as reported profit jumped to $0.70 per share. "Our growth has been profitable, capital-efficient, and broad-based across our entire global portfolio," Campion said in a conference call.
Sprinting into the holidays
Nike's recently announced sale of the Hurley brand will hurt reported revenue this quarter, management said in its updated outlook. However, it will be a net win in terms of profit for the year.
The rest of the outlook refresh was positive, with currency-neutral growth now expected to rise in the low double-digit range despite the financial hit from Hurley. Executives three months ago predicted high single-digit growth, before the Hurley sale was announced. Hitting the new mark would constitute a significant sales acceleration compared with 2018.
As for earnings, the profit picture won't look quite as impressive next quarter due to the timing of a few expenses. Yet Nike still expects to boost gross profit margin for the full year while making targeted growth investments that take advantage of its unique leadership position in the industry.
Meanwhile, Nike continues to be an aggressive buyer of its own shares, spending almost $1 billion on stock repurchases in each of the last two quarters. Management says it's confident that it has the right global expansion strategy in place, and it's backing up those words by allocating more cash toward direct shareholder returns.