Nike Q2 Earnings: Company Beats On Earnings; Domestic Slump Continues

On paper, Nike (NYSE:NKE) has posted a good quarter with earnings and revenues beating the consensus estimates by a comfortable margin. The top line was driven primarily by higher sales volumes in the international markets, most notably in Greater China and Europe. That said, margins shrunk in the quarter as the company locked itself into a pricing war with Puma and Adidas in its biggest market – North America. Additionally, as expected, the sustained slump in the saturated U.S. market proved a major headwind in the quarter. Such conditions are expected to continue well through most of, if not all of, 2018 as well.

Key Highlights From The Quarter:

• As mentioned above, the company’s revenues suffered a notable setback in the U.S. market. Fall in demand for its footwear and sports equipment businesses in the region led to an approximate 5% decline in revenue from this market. However, exceptional growth figures in China and Europe more than offset this decline. Revenues in China grew by a significant 16%, while revenues in Europe jumped by a massive 19% in the quarter.
• The company highlighted the fact that its international business now accounts for about 55% of its total business. Additionally, it expects this non-domestic growth to account for nearly 75% of the total incremental growth over the next five years. This seems highly plausible considering Nike’s aim to tap into high-potential emerging markets to increase its overall revenues.
• As mentioned at the beginning of the fiscal year, Nike is increasingly shifting its focus towards digital. The company believes that building a digital ecosystem not only enables customers to access its portfolio easily, but also allows Nike to better assess the average customer’s needs. For example, the Nike+ app’s Reserved For You service has helped the company garner 40 times more sales than is possible with traditional outreach methods. This is a notable win for the company.
• Nike’s footwear segment, which saw growth slowing through most of 2017, has seen good demand in Q2. Most of the success in the quarter was due to the heavy demand for the company’s top rated running shoes – the Air Max series – and in basketball, the latest LeBron 15, both of which have received great responses from customers. We expect the demand in the second half of the fiscal year to pick up even further as the company gets ready to launch more innovative products in the coming months.

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