Earnings Review: No Slowdown In Sight For Nike

Sports giant Nike (NYSE:NKE) recorded another strong quarter in Q1 2016, with revenue rising by 5% annually to $8.4 billion, lifted by continued growth in all product types and geographies. The gross margin expanded by 90 basis points year over year, on the back of an increase in average selling prices and growth in the higher margin direct-to-consumer (DTC) business.  It was partially offset by an increase in input costs, the negative impact of currency fluctuations and slightly higher warehousing costs. In constant currency terms, the company reported a revenue increase of 14%.  Additionally, Nike Brand DTC was up 21% for the quarter on a year-over-year basis. ^[1]

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

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North America Strong As Ever

In the first quarter of fiscal 2016, Nike recorded a very profitable quarter in North America with reported revenues growing at 9.  ^[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 over 60% market share. Footwear sales are driven by the basketball product 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, Lebron James, Kevin Durant and Kobe Bryant to sell its products. New endorsement deals are required for the company to keep up its market share. So a slight decline in the growth in earnings before taxes at 7% compared to revenue growth hints that expenses grew faster than revenues this quarter. ^[2] This could conceivably be due to higher demand creation expenses or higher expenses on endorsement deals. Growing competition from newcomers like Under Armour is putting this kind of pressure on Nike and the way it handles its expenses in the future is something to keep an eye on.

Still, Nike’s remarkable performance in North America is something to envy for a lot of other companies as it shows how to capture growth in the market despite competition from an ever rising number of competitors. The company is a market leader not only in basketball, but also in running categories, and leverages the insight gained from those segments to seize on the significant growth opportunities in relatively untapped areas like e-commerce and women’s and young athletes apparel.

NIKE Remains Unaffected By China Slowdown

The company’s performance in China exceeded our expectations this quarter. Nike’s China revenues grew by a very robust 30% in the quarter. ^[2] 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. There has been plenty of speculation regarding the kind of impact the Chinese stock market crash would have on consumer spending in China. But Nike’s brand showed continued strength in both the footwear and apparel categories, growing by 30% and 22% respectively compared to last year’s figures in this quarter. ^[2] However, Nike’s revenue in China is still less than one-fourth its revenue from North America. So the region offers plenty of scope for growth in the coming quarters and years. Impressively, Nike’s reported future orders from China grew by 22% for the quarter, so we expect its growth momentum in the region to continue. ^[2]

Footwear Drives Europe Growth

Nike brand revenues in Western Europe grew by 14% (in constant currency terms) in Q1 2016, further confirming that Nike is gaining ground over market leader Adidas. ^[2] Similar to the re-basing of its operations in China, Nike undertook a re-basing of its operations in Europe two years ago. The company introduced new shop-in-shop concepts at established sports retailers like JD Sports, Foot Locker, and Intersport in the region, in addition to the introduction of new store concepts in its own retail stores and online. The strategy seems to be 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’s growth in Western Europe was mostly driven by the footwear category, which grew at 19% for the quarter compared to 3% growth in apparel and 4% in equipment. The company’s Direct to Consumer strategy also continues to do extremely well in Europe, reporting a growth of 31% in Q1. ^[3] In constant currency terms, reported future orders from Western Europe grew at 22%, so we expect the momentum in Europe to continue in the coming quarters.

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1. NIKE, Inc. Reports Fiscal 2016 First Quarter Results, Business Wire, September 2015 [↩]
2. Ref: 1 [↩] [↩] [↩] [↩] [↩] [↩]
3. Nike’s (NKE) CEO Mark Parker on Q1 2016 Results – Earnings Call Transcript, Seeking Alpha, September 2015 [↩]