Nike (NYSE: NKE) kicked off its 2018 fiscal year with its first-quarter earnings announcement in mid-September. As expected, the footwear and sports apparel titan's business trends weren't exciting. Sales held flat and profitability declined.
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CEO Mark Parker held a conference call with investors to add context to those headline numbers and put them into long-term perspective. Here are the key highlights from that presentation.
The U.S. market is a mess
"For North America... we still see a dynamic and promotional landscape, one that is having a pronounced impact on physical retail, especially in light of the continued consumer shifts toward digital." -- Vice President Trevor Edwards
Executives had warned in July that the U.S. market was weak and might contract through the first half of fiscal 2018. That prediction is playing out so far. Revenue fell 3% in the segment and earnings were flat at just over $1 billion.
Still, Nike executives described a market that's deteriorating even more. "Over the past 90 days it has become increasingly evident... that the North America marketplace is undergoing significant transformation," Chief Financial Officer Andy Campion said.
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Rival Under Armour (NYSE: UA) (NYSE: UAA) cited these worsening conditions when it lowered its 2017 sales outlook in early August and Nike confirmed that these struggles are affecting the industry leader, too.
International markets are healthy
"Our international business is now over 55% of our revenue...and there's much more opportunity ahead in our developing markets." -- Parker
The international segment was a bright spot for Nike this quarter, mainly because sales spiked higher by double digits in China. Executives see the Chinese market as a blueprint for what the entire business could achieve in a few years, since consumers there are already embracing the direct-to-consumer channels that the company is pivoting toward in the U.S.
This dynamic makes Nike's international focus -- with more than half of its revenue coming from outside the U.S. compared to less than 20% for Under Armour -- a key competitive advantage.
Innovation wins are helping
"Air VaporMax has grabbed No. 1 market share in the U.S. at the $150-and-up... price-point. The success we are seeing with VaporMax is lifting our entire Air platform." -- Parker
Nike's gross profit margin fell this quarter, dipping by almost two full percentage points to 43.7% of sales. That shift combined with rising costs to send earnings down a brutal 22%.
Yet the gross profit slump was almost entirely due to foreign currency swings, and not on the type of retailer price cuts that pinched earnings results in fiscal year 2017.
Innovation is the company's best hope for sustainable profit gains, and that's why it's good news that Nike continues to crank out new products that attract healthy demand at premium price points. Executives highlighted a long list of recent launches across its apparel, footwear, and equipment categories as part of a strategic initiative aimed at improving both the impact and the speed of product introductions.
Management is predicting sales to follow the broad pattern that investors saw this quarter, meaning solid international growth should offset the slight contraction in the U.S. segment. The home market challenges are hurting earnings, though, and so Nike now believes the U.S. could cause overall gross margin, excluding currency changes, to fall by between 0.5% and 1%. The company's pivot toward direct-to-consumer sales channels will boost costs, too, and add even more pressure on short-term earnings.
Executives said they believe these moves will put them in position to recapture a healthier growth rate, and Parker and his team promised to provide more details on their rebound plan during their investor meeting later in October.
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Demitrios Kalogeropoulos owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.