Nike Earnings Preview: US, China Key To Growth

Sports giant Nike (NYSE:NKE) is scheduled to report its earnings for the first quarter of fiscal 2016 on Thursday, September 24th. (Fiscal years end with May.) In the previous quarter, the company reported a revenue growth of 5% to $7.8 billion. The company’s strong performance in Q4 2015 was underscored by rapid growth in North America, Western Europe, and Greater China. High demand in running, basketball, and football categories continues to fuel the growth momentum for Nike. Additionally, Nike Brand DTC (i.e., Direct To Consumer) was up 27% for the quarter. ^[1]

Nike has guided for a low single-digit growth in revenues for the first quarter of fiscal 2016, with a 50 basis point expansion in the gross margin, on account of a shift to higher margin products in the sales mix and improved performance of its higher margin businesses. The company expects its overhead expenses to rise owing to investments undertaken by the company in its DTC business and e-commerce channel. ^[2] We expect the company’s earnings to be in line with its guidance, given the company’s commentary.

See our complete analysis for Nike

Recap of Q4 FY15 Results

In the fourth quarter of Fiscal 2015, Nike’s revenues from continuing operations were up by 5% on a reported basis. The company suffered significantly because of the negative impact of currency fluctuations. Excluding currency impact, the company’s top line grew by 13%. The gross margin expanded by 60 basis points year over year, driven by a shift in the sales mix to higher margin products and continued growth in all product types and geographies.  Also contributing was strong growth in the higher margin DTC business, though an increase in input costs partially offset the aggregate improvement. The company’s strong performance in Q4 2015 was underscored by high growth in North America and Europe. High demand in running, basketball, and football categories continues to fuel the growth momentum for Nike.

The company’s performance in China exceeded our expectations in the quarter. China revenues grew by 20%. Given that China is one of the largest markets for athletic footwear and apparel in the world, and that revenue from the region is still only a fourth of the company’s revenue from North America, there is an enormous growth opportunity for the company in this market. We have already written about the problems Nike faces in establishing a strong foothold in there. (See: Nike’s China Problem) But Nike’s strong performance over the past three quarters has helped Nike achieve the leading position in both the athletic footwear and apparel markets.

North America And China Hold Key

North America represents the biggest market for Nike, accounting for about 40% of its revenues. The company is the market leader in the North American athletic footwear market, with over 60% market share. Moreover, sales in the footwear category are driven by the basketball category, which has higher margins than other footwear categories. Basketball is Nike’s single biggest revenue category and contributed around $4 billion in revenue in fiscal 2015, implying a year on year growth of 21%. New product launches such as the LEBRON 12, KYRIE 1, Air Jordan XX9 and the Super Fly 3 should help the company retain its momentum in the coming quarters. ^[3]

China is expected to hold the key to Nike’s future growth, owing to its large population and a fast growing economy. However, Nike’s Chinese sales struggled in the recent past due to ineffective brand positioning. The company has been actively addressing this situation by focusing its assortment with a greater level of precision on sports and products that are most preferred by Chinese consumers. To this end, Nike had to set up new distribution centers and increase its marketing capacity in the region. The sales figures following this restructuring process will be a key indicator of Nike’s health in China. So far signs have been encouraging. In fiscal 2015, Nike’s revenues from  Greater China rose 19%. ^[3] However, the trajectory of growth in sales from Greater China is unlikely to be linear as the Chinese market faces the effects of an economic slowdown.

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1. NIKE, Inc. Reports Fiscal 2015 Fourth Quarter and Full Year Results, Businesswire, June 2015 [↩]
2. NIKE’s (NKE) CEO Mark Parker on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, June 2015 [↩]
3. Ref: 2 [↩] [↩]