Nike (NYSE: NKE) announced fiscal second-quarter earnings results in late December that beat the targets management had issued a few months earlier. As usual, though, the devil was in the details. Nike's report showed no rebound in the key U.S. market, while the international division outperformed expectations.
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Following the results, the sports apparel and footwear titan held a conference call with analysts that put those broad operating trends in context with management's turnaround plan. Below are a few of the highlights for investors from that chat.
The U.S. market will take more work
In the U.S., we're creating a healthier market as we: 1. Manage supply tightly to demand, 2. deliver stronger full-price sell-through with new innovation, 3. drive brand heat, 4. and most importantly, make the investments that fuel long-term growth.
-- Trevor Edwards, president of Nike brand
Nike told investors back in September that executives weren't expecting a quick recovery in the U.S. market. Demand trends were weak, they said, and its sales network still had plenty of excess inventory to work through. In the intervening weeks, though, many retailers, including Foot Locker, reported surprisingly strong customer traffic that fed investor optimism that Nike would post better numbers in this division.
That didn't happen. Instead, the U.S. segment shrank sales by 5% to mark a step backwards from the prior quarter's 4% decline. On the bright side, executives are seeing hints of firming demand trends, along with a healthy direct-to-consumer business, and so they predicted "significantly less contraction" in the second half of the fiscal year. That forecast is good news for the business, but it means more time, and more work ahead, before the U.S. market stops shrinking.
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Improved profitability on the way
We are accelerating execution against a strategy that is fueling stronger growth and a return to expanding profitability.
-- Chief Financial Officer Andy Campion
Nike's profitability came in slightly better than expected as gross margin contracted by 1.2 percentage points, compared to a 1.8-percentage-point slump in the prior quarter. Two factors drove the improvement. First, a flood of new product releases energized important franchises like the VaporMax running platform and the Jordan brand. And second, Nike's direct-to-consumer business outpaced overall revenue growth, spiking 15% with help from a 29% surge in online sales. These sales are roughly twice as profitable as transactions the company completes through its retailing partners.
Looking ahead, executives expressed confidence that the company would return to expanding profitability soon, likely by the next fiscal year, just as they had predicted as part of their long-term growth plan released in October.
Aggressive innovation plans
The second half of [this fiscal year] will showcase Nike's unrivaled ability to deliver performance and sport style innovation at scale.
Nike plans to release dozens of new products across its footwear and apparel franchises over the next six months, and that launch calendar sets up a major test of its core competitive strengths. After all, executives believe that the path back to premium prices, and faster growth, goes directly through high-quality innovations.
Given that Nike is set to introduce consumers to its most aggressive pipeline of product releases to date, investors will be looking for proof that the offerings can deliver faster sales while reversing the profitability slide that's pressured results for almost two years. This report only contained hints at that potential rebound, and now it's up to the company to extend those modest wins into something that looks more like a sustainable recovery.
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