When Nike (NYSE:NKE) announced mixed fiscal third quarter 2015 results last Thursday, the market didn't know what to think of its performance at first. Though Nike beat earnings expectations, international currency headwinds caused revenue to fall short of Wall Street's demands.
As a result, Nike stock initially waffled between positive and negative territory in Thursday's after-hours trading. But then the stock rose more than 4% after Nike management offered encouraging perspective during their subsequent conference call with analysts. Here are five of the most important points they made:
1. Nike isn't immune to macro headwinds
"Over the last three months, the macro environment has become increasingly volatile. Foreign currency headwinds have intensified. Product input costs continue to fluctuate, and the political landscape is evolving in many countries around the world. This is the environment in which all multinational companies now operate, and Nike is not immune to it." -- Nike CEO Mark Parker
First, Parker didn't attempt to sugarcoat the situation in key geographies overseas. Over 53% of Nike Brand revenue came from international markets during the quarter, so it was no surprise the strong dollar and weak international currencies held back Nike's reported revenue. Of course, it also helped that Parker foreshadowed this situation during last quarter's call, promising to investors Nike would do its best to "balance making critical investments with managing risks, whether they be currency headwinds, commodity cost fluctuations, or an evolving political landscape."
I suspect this also made the market more willing to accept the fact that Nike's initial fiscal 2016 guidance -- which calls for reported growth in revenue and earnings per share in the "mid-single digits" and "high-single- to low-double-digit" range, respectively -- came in slightly lighter than Wall Street's models.
2. But those headwinds also mean opportunity
"The difference for Nike, however, is that we see this as an opportunity to create further separation in the marketplace. Our globally diverse portfolio of geographies, categories, brands, product types, and distribution channels gives us a distinct competitive advantage. By going deep into the business, we're able to see opportunities to serve the consumer and drive growth, despite the choppier landscape." -- Mark Parker
Perhaps even more encouraging is that Nike isn't content to merely sit back and wait for the economic pressures to abate. To the contrary, based on Parker's comment above, Nike is pushing hard to use its deep pockets, global reach, and massive selection of innovative products to gain market share as competitors struggle amid the uncertainty. When the global market returns to more normal conditions, Nike should emerge stronger than ever relative to its peers.
3. Customers love Nike's innovation
"The pace of innovation at Nike has never been faster, and our pipeline has never been more robust. [...] Individually and collectively, our product innovation is breaking new ground across all of our categories. And as excited as we are about the technical details of each product, what's most important is how well our products are resonating with athletes and consumers, which we clearly saw in the quarter." -- Mark Parker
Nike's gross margin has also continued to expand during the quarter, this time by 140 basis points to 45.9%. For that, investors can thank Nike's ability to command higher prices given its strong brand and focus on introducing innovative products.
Parker offered several examples of positive responses to such innovation, including feedback for its new LunarTempo running shoe, which "merges speed with cushioning for a great ride over the longer runs." Or consider the new MetCon 1 training shoe, a "first of its kind, high-intensity shoe that has been incredibly popular in the marketplace," Parker says, "And it's just a hint at what's to come in men's training."
4. E-commerce just reached a key milestone
"We continue to see tremendous growth in our e-commerce business as nike.com was up 42% in the quarter. Traffic and conversion both increased. And for the first time in our history, mobile traffic exceeded desktop traffic helped in part by the introduction of the SNKRS app. Going forward, we will continue to invest in this area to best serve our consumer." -- Mark Parker
For perspective, Nike strategically released its new SNKRS app -- which is essentially a one-stop shop to help consumers buy the most "coveted" Nike shoes from their mobile devices -- during the NBA All-Star game in February. Nike also expanded the sharing capabilities in its Nike+ training club app, and extended it to 18 languages. In any case, it should come as little surprise mobile e-commerce traffic finally outpaced that of desktop visitors, but investors should be pleased Nike is both aggressively chasing and improving conversion for this fast-growing business pipeline.
5. Nike's direct-to-consumer business is firing on all cylinders
"NIKE Brand DTC revenue increased 29% driven by all concepts in all geographies. And as Mark mentioned, we also saw continued strong growth in nike.com. And global futures are up 11%, reflecting a strong growth despite comparisons to the prior year, which included strong World Cup demand. Excluding the impact of the World Cup, we estimate future orders would have grown in the mid-teens." -- Nike brand president Trevor Edwards
Finally, the direct-to-consumer business is attractive in that it not only offers Nike higher margins than selling product through third parties, but also gives Nike better control over the message it relays to consumers. And Nike's futures performance was made all that much more impressive considering it lapped a massive surge in sales fueled by last year's FIFA World Cup, after which Nike ramped up "demand creation" investments to extend the event's momentum as long as possible.
As it stands, and contrary to what Nike's reported results seemed to indicate at first, it's clear Nike's business has never been stronger. All things considered, I'm still convinced Nike investors stand to reap significant rewards from here, even with Nike stock trading within reach of a fresh all-time high.