Nike Earnings: Company Delivers Another Strong Quarter Despite Currency Headwinds

Nike posted a solid earnings on December 22nd, reporting healthy increases in revenues across all geographies and most product categories. Apart from recording good numbers across the board, the company has also seen heavy increases in its orders, spurred mainly by businesses in China and Europe. Business in North America continues to remain strong and ever expanding. Despite the solid performance, however, Nike continues to face currency headwinds as the dollar remains strong. Another highlight is the expansion of gross margins through sustained strategic pricing and product cost management. The market received the results very well with Nike’s stock price rising by 3%, hitting an all time high (of $135.72) in after hours trading. The company expects this momentum to continue into the remainder of the financial year as well.

Financial Highlights from Q2:

• Company recorded revenues at $7.7 billion (4% year-over-year growth), just short of which missed analyst expectations of $7.8 billion. However, on a constant currency basis the revenues grew by 12%.
• Earnings per share were recorded at $0.90, solidly above the consensus estimate of $0.86.
• Nike posted incomes of $785 million, which is significantly up from $655 million from a year ago. ((Nike’s Q2 Fy16 Earnings Call Transcript, www.seekingalpha.com))

Nike Performs Solidly in all Geographies:

The Oregon-based sports giant seems to have performed well in all geographies with North America and China emerging as the forerunners. As always, the company’s performance in North America was consistent with the performances in earlier quarters, as expected. Revenues in the region were up about 10%, while future orders were up 14%. The growth was primarily driven by double-digit growth in the company’s brands like Jordan, Sportswear, Running and Men’s Training. The company saw a steady increase in demand across all its sales platforms, including retail partners like Footlocker and Dick’s Sporting Goods. Nike DTC (i.e., direct-to-customer) channel also saw a strong quarter, with a growth of about 17% driven primarily by Nike.com and comparable  store sales growth. Going forward, Nike management is confident that North America will show consistent improvement in operations, which in turn will lead to higher unit sales and increased revenue figures.

In Europe (specifically Western Europe), revenue growth was recorded at 12%, while orders grew to the tune of 25%. As mentioned earlier, Nike has been consistently attempting to improve its sales strategies in Europe. In this respect, the company has increased its efforts at JD Sports, Footlocker and Intersport. Apart from this, the sports giant’s DTC business also saw higher demand, which resulted in 26% growth in business, aided by the popularity of Sportswear and Global Football in the region. This has helped cement Nike as one the most coveted sports brands in the region, with growth witnessed across all regions. However, it should be noted here that the weak Euro has had an adverse impact on revenues, which is expected to continue into the near future.

In keeping with the momentum gained in the last quarter, Nike saw really great growth figures in Greater China this quarter as well. Revenues in the region witnessed 28% growth, while futures orders grew at a whopping 34% rate. This goes to show that the company’s growth strategies for China seem to be working very well, spurring healthy demand. The increase in revenues can be attributed to the significant growth seen in Sportswear, Running and Nike Basketball across the region. Even Nike’s DTC operations witnessed  very strong growth of about 51%, fueled partly by the most successful Singles Day event in the geography’s history. Furthermore, Nike.com is also seeing good growth. This is primarily because China (the world’s second largest economy) is one of the most “mobile and connected” countries in the world. The management sees great potential and opportunity in the region going forward.

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Key Partnerships:

According to the management, product and design innovation is fueled by partnerships. Nike’s business has grown significantly over the years due to the company’s collaborations with notable athletes and teams. Such partnerships allow Nike to better its product offerings by learning from the needs and concerns of leaders in the sports world. Apart from the longstanding relations with athletes, the company has also forged two new partnerships this quarter.

First, Nike has partnered with Dreamworks this quarter — specifically its technology company called NOVA. The partnership aims to better the sports giant’s design capabilities. NOVA is a leader in determining an animated body in motion. By combining forces, Nike aims to increase the speed, productivity and innovation of its design process.  Such a partnership may help the company better its design strategies to best understand the needs of customers, which could lead to a better line of products being introduced into the market. Second, the Oregon-based company has partnered with FLEX. Nike hopes to revolutionize its manufacturing strategies through this collaboration. For instance, FLEX has helped introduce a specific process in which automated material management and automated cutting is combined in order to reduce wastage by almost 50%. It is believed that such manufacturing reforms will benefit customers, who can now expect a larger product line, as well as shorter delivery times.

Keeping Up With the Boom in E-commerce:

Companies throughout the world are witnessing a change in consumer consumption. Today, people tend to buy products online rather than at physical brick and mortar stores. This has got companies scrambling to better their e-commerce offerings in order capitalize on this new trend. Nike, too, has understood the importance of making the most of this. This quarter, in keeping with its strategies to increase its e-commerce offerings, Nike has added Canada, Switzerland and Norway to the list of e-commerce markets it now serves. Furthermore, on a constant currency basis, this quarter witnessed a 50% growth in sales on Nike.com. By expanding Nike.com, the company aims to make its products more accessible to potential customers, who can now access the full range of products on offer from the convenience of their homes.

The company has already made many investments in this direction and will continue to do so going into the future. Next quarter, the company aims to introduce its e-commerce platforms to the consumers in Mexico, Chile and Turkey. By 2020, the management expects to earn revenues of up to $7 billion through e-commerce.

The management seems optimistic that Nike will continue to perform well in the remainder of the fiscal year. However, they have cautioned investors that Q3 may see a decline in gross margins (by about 50 basis points) as the company aims to efficiently clear out its remaining inventories, while bringing more products to the market. Despite this though, the sports giant expects that gross margins will increase about 50 basis points in FY16.

Right now, it seems that Nike’s party is no where close to ending. The company has projected revenues of up to $50 billion by 2020. Given the current momentum, it seems highly plausible that the company could match or even surpass this estimate. What really happens though will only be revealed in time.

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