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Nike's Earnings Call: 3 Takeaways

By Demitri Kalogeropoulos - Jun 30, 2021 at 10:45AM

Key Points

  • Nike is back in full growth mode.
  • Management says that a more profitable earnings model is already visible.
  • Look for the shift towards direct-to-consumer sales to push margins and cash flow higher over time.

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Management says it has a new growth model that investors will love.

Nike (NKE -0.53%) shocked Wall Street pros this past week by announcing a sharp growth rebound, rising profit margins, and robust demand trends heading into its new fiscal year. The footwear giant also issued an aggressive outlook that calls for fundamentally better results over the next few years than investors had seen just before the pandemic struck.

In a conference call with analysts, CEO John Donahoe and his team explained why they believe the business is on a better footing today, with many attractive growth opportunities ahead. Let's look at the key takeaways from that quarterly presentation.

A young woman jogs over a bridge at sunrise.

Image source: Getty Images.

1. Setting the pace

Nike's 96% sales spike year over year marked an emphatic end to its pandemic slump, with sales rising 21% compared to the fourth quarter of 2019 (before COVID-19 started impacting results). That result trounced expectations. It also kept the industry leader ahead of rivals like lululemon athletica, which earlier reported an 83% revenue boost year over year.

Executives said Nike benefited from some big tailwinds, including the return of live sports and a rising consumer interest in e-commerce, health, and exercise. But the market-trouncing growth was powered by advantages that peers can't copy.

That list includes spending on athletic sponsorships and brand events, which landed at $1 billion this quarter (up 21%). "Nike sets the pace through a continuous flow of innovation, the world's greatest roster of athletes, and compelling experiences for consumers," Donahoe said.

2. There's a new financial model

The pandemic accelerated the shift toward digital sales, and away from the retailing partnerships that Nike traditionally relied on to get its products into consumers' hands. E-commerce in fiscal 2021 passed 20% of all sales, in fact, several years ahead of management's original plan.

NKE Gross Profit Margin Chart

NKE gross profit margin data by YCharts.

That change is lifting profit margins since direct sales to consumers carry higher prices. But the more valuable long-term impact is that Nike is making direct connections with its fans through its portfolio of mobile apps. Those enduring relationships are giving management more confidence in its growth potential. "It is clear that our [digital] strategy is transforming Nike's financial model," CFO Matthew Friend said.

3. Growth opportunities ahead

Nike sees several prime growth opportunities set to deliver gains over the next few years, including women's footwear, apparel, the Jordan brand, and the Chinese market. Those boosts will combine with the fundamental shift toward digital sales to power a stronger business than shareholders have been used to seeing. Sales will rise by nearly 10% annually, management said, even as gross profit margin marches higher. The biggest single metric supporting those gains will be the direct-to-consumer business, which is set to cross 60% of all sales by 2025, compared to 40% today.

The next step on that journey involves Nike reaching $50 billion of annual sales in the fiscal year that just started, which equates to low double-digit growth. Executives also predicted that gross profit margin will swell again as rising prices offset increased costs in areas like transportation, labor, and materials.

These aggressive targets aren't simply aspirational, but reflect the impressive gains that Nike already achieved in the second half of fiscal 2021. That's why investors should have even more confidence that the company can hit its new financial goals. "These metrics now become the new baseline from which we expect to grow," Friend said.

Demitri Kalogeropoulos owns shares of Nike. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$113.87 (-0.53%) $0.61
Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU
$317.80 (0.44%) $1.40

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