Nike Pre-Earnings: Growth Momentum Likely To Continue Going Forward As Sales Improve Globally

Nike (NYSE:NKE) is all set to release its earnings for Q2 FY16 (ending November 30th) on December 22nd. Last quarter, the sports giant impressed investors with very solid numbers, propelled by the increased growth in all product categories and geographies. This momentum most likely continued into the second quarter. Most analysts believe that this quarter Nike will post numbers that will beat the consensus estimates. Continued growth in the U.S. (due to better endorsements and the holiday season) and increased demand in China and Europe are likely to have helped propel the top line this time around.

Financial Highlights from Q1 FY 2016 Ended August 31st:

• Total revenue grew by 5% year on year to reach about $8.4 billion. On a constant currency basis, the revenues were up 14%.
• Business in North America grew by about 9% year over year.
• Despite the slowdown in China, revenues in the country grew by a significant 30%. Footwear and apparel grew by 30% and 22% respectively.
• Nike saw good growth numbers in Europe as well. Revenues in the region recorded growth of 14% (in constant currency terms). Footwear, apparel and equipment segments grew at 19%, 3% and 4%, respectively. ^[1]

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Continued Growth in North America, China and Europe:

Nike recently announced a revenue target of $50 billion by 2020. Of this total, about $20 billion in revenues is expected to come from businesses in North America. ^[2] It should be noted here that the region accounts for almost 40% of total revenue for the company. Most of the growth from quarter to quarter comes from Nike’s footwear segment, which accounts for about 60% of the total market share in the region. Furthermore, the sports giant is the market leader when it comes to basketball footwear, which incidentally has higher margins when compared to other footwear categories. What gives the company an edge in this highly saturated market is the number of key endorsements that the company has secured over the years. Notable NBA figures including Michael Jordan, Kobe Bryant and Lebron James have helped spur the sales of its products over the years. Increased sales from the holiday season and better e-commerce strategies can keep this momentum alive going forward.

Despite a slowing economy in China, Nike has seen high growth rates in the region. China also happens to be the largest market for athletic footwear and apparel in the world at present. With better marketing strategies and key investments, Nike can aim to secure a strong foothold in this market, while benefiting from the natural growth in the sports apparel industry in the region. At the same time, business in Europe is also seeing increased growth rates, especially in the footwear segment. As in China, the company recently changed its strategy in Europe, which seems to be working well. The company introduced a new shop-in-shop concept in partnership with already established sports retailers like JD Sports, Intersport and Foot Locker. Apart from this, Nike has also revamped the retail strategies at its stores and online, which seem to be working well. It is expected such growth continued into the second quarter.

Stronger Dollar will Continue to Weigh on Profits:

Nike, like many companies in the U.S., has been plagued by unfavorable exchange rates as the dollar continues to gain strength. As mentioned previously, the company would have posted an impressive 14% growth in revenues if it wasn’t for the current exchange rates, which led to a significantly lower 5% growth. This has been the highest appreciation of the dollar in almost 40 years. This trend is likely to continue going into 2016, as the American economy continues to grow, while the rest of the world suffers slowing, and the Fed readies an increase in interest rates.

More than half of Nike’s revenues come from international markets. It is for this reason that the company will continue to face currency headwinds that will continue to affect the top line. However, organic growth is expected to remain solid on the back of strong sales in North America, Europe and China.

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1. Nike’s Q1 Fy16 Earnings Call Transcript, www.seekingalpha.com [↩]
2. 2015 Nike Investor Meeting, www.nike.com [↩]