Earnings Review: Nike Continues Its Strong Run

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Sports giant Nike (NYSE:NKE) recorded another strong quarter in Q4 2015, with revenue rising by 5% annually to $7.8 billion, lifted by continued growth in all product types and geographies. The gross margin expanded by 60 basis points year over year, on the back of a shift in the sales mix to higher margin products and growth in the higher margin direct-to-consumer (DTC) business.  It was partially offset by an increase in input costs and the negative impact of currency fluctuations. In constant currency terms, the company reported a revenue increase of 13%. The company’s strong performance in Q4 2015 was underscored by high growth in North America, Western Europe, and Greater China. High demand in running, basketball, and football categories continue to fuel the growth momentum for Nike. Additionally, Nike Brand DTC was up 29% for the full year. [1]

We are in the process of revising our $92 price estimate for Nike’s stock.

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North America Continues To Be Strong

In fiscal 2015, Nike recorded its most profitable year ever in North America with reported earnings before interest and tax rising faster at 18% than reported revenues (12%).  [2] North America represents the biggest market for Nike, accounting for ~40% of its revenues. The company is the market leader in the North American athletic footwear market, with nearly 60% market share. Moreover, sales in the footwear category are driven by the basketball category, which has higher margins than other footwear categories. Nike’s strong footwear performance is based on using endorsements by iconic figures such as Michael Jordan and Kobe Bryant to sell its products. New endorsement deals, such as those with Lebron James and Kevin Durant, should help Nike retain the same strength over the coming quarters. Additionally, the strength of the company’s growing Direct-to-Consumer business should ensure that sales in this region remain solid.

The remarkable performance in this geography shows the strength of the Nike brand as it has managed to capture growth in the market and seize share from an ever rising number of competitors at the same time. The company is a market leader in the basketball and running categories, and leverages the insight gained from those segments to capture the significant growth opportunities in areas like e-commerce and women’s and young athletes apparel. Nike applies discrete strategies to individual segments, identifying the opportunities in each category and applying different strategies to capitalize on them.

China Turnaround Going Strong

The company’s performance in China exceeded our expectations this quarter. In the previous quarter, China revenues grew by 20%. Given that China is one of the largest markets for athletic footwear and apparel in the world, the geography provides a significant growth opportunity for Nike. We have already written about the problems Nike faces in establishing a strong foothold in this market. (See: Nike’s China Problem) But Nike’s strong performance over the past year has helped Nike achieve the leading position in both the athletic footwear and apparel markets.

Previously beset by the accumulation of unsold inventory and an  indifferent response to new product launches, Nike decided to reset its strategy for China in fiscal 2014. The company believes that it has made good progress on that front and expects to achieve sustainable double-digit growth from the region soon. The sports retailer also changed the assortment of inventory it sells to wholesale partners in China, undertook the re-profiling of multiple stores in the region, and reduced the levels of inventory considerably. However, Nike has positioned itself as a relatively premium brand in China compared to its brand positioning in Europe and North America. As a result, its wholesale partners are seeing strong comparable store sales growth and the profitability of stores that were re-profiled is also increasing.

Europe Continues To Surprise

Nike brand revenues in Western Europe grew by 17% (in constant currency terms) in Q4 2015, further confirming that Nike is gaining ground over market leader Adidas. [2] Similar to the operations in China, Nike undertook a re-basing of its operations in Europe two years ago. The company introduced shop-in-shop concepts at sports retailers like JD Sports, Foot Locker, and Intersport, in addition to trying out new store concepts in its own retail stores and online. The strategy has been successful, with Nike now the leader in the footwear market in all countries key to its business in Europe.  In fact, it is the preferred sports brand in each of the top 10 cities in Western Europe.

Nike brand revenues in Central and Eastern Europe saw 20% annual revenue growth in Q4 fueled by double-digit growth in every geography. ((Ref: 1)) We expect high growth in this market in fiscal 2016 due to growing economic prosperity in the region. Recent futures order growth at 17% (in constant currency terms) supports our outlook. [2]

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Notes:
  1. NIKE, Inc. Reports Fiscal 2015 Fourth Quarter Results, Business Wire, June 2015 []
  2. Ref: 1 [] [] []