Inventors had high hopes heading into Nike's (NKE 0.66%) earnings report late last week. While sales dropped in each of the prior two quarters, the trend was positive and suggested a dramatic return to sales growth for the apparel giant's fiscal second quarter.
Shareholders weren't disappointed.
Nike on Friday afternoon revealed that sales grew in each of its markets, including the key U.S. division, which means investors might expect a strong close to its fiscal 2021 over the next six months.
Let's dive right in.
Image source: Getty Images.
Growth wins
The global growth recovery continued, with sales rising 7% year over year after adjusting for currency exchange shifts, compared with last quarter's 1% dip and the 38% year-over-year plunge Nike reported at the end of fiscal 2020. That boost surpassed Wall Street's expectations and included several positive signs for the business.
For one, Nike got back into positive territory in the U.S. despite continued pressure on the business from COVID-19 restrictions. It helped that the digital sales channel roughly doubled, year over year, even as stores struggled with weak customer traffic. "Fueled by compelling innovation product and global brand momentum," CEO John Donahoe said in a press release, "we continue to extend our leadership."
Nike's China segment, which has been a key growth pillar in recent years, shot 19% higher to mark a sharp acceleration over the prior quarter's 8% jump.
More cost pressures
Nike executives back in September warned investors about short-term challenges, which did have an impact. Nike had to cut prices on some products to work through extra inventory from the spring retailing shutdowns. As a result, gross profit margin fell by nearly a full percentage point to 43% of sales.
The good news is that management held the line on selling expenses. Nike also spent much less on marketing than it normally would because of the relative lack of sporting events. Overall, net income jumped 12% to $1.3 billion, and pre-tax earnings rose 17%. "Our strategy is working," Donahoe explained.
Looking ahead
Nike still has to walk a fine line when it comes to inventory. The company is being cautious when it comes to buying supplies, given the wide range of potential economic conditions over the next several months. Elevated inventory levels also have management predicting another quarter of subdued gross margins ahead.
But that outlook is improving, both in the short term (thanks to strong sales growth) and over the long term as Nike gets more of its sales from direct-to-consumer purchases rather than through the wholesale channel. Its recent performance has taken some of the worst-case scenario options off the table, too, executives said in a conference call with Wall Street analysts.
That means investors should be a bit more optimistic about Nike's fiscal 2021 than they were before this report. And the key reasons to be bullish about the next few years, including the shift toward digital sales and the huge opportunities in China, seem as solid as ever. That's why if you haven't put this winning growth stock in your portfolio, it still looks like a solid buy even after the run-up shares have had through most of 2020.
