Nike (NYSE: NKE) announced earnings results this week that, while marred by a few weak spots, delivered on the goals that management had set out back in June. Sales growth sped up in the key U.S. market thanks to a booming digital sales channel and several innovative product releases. Profitability improved, too, as selling prices rose faster than expenses.
Let's take a closer look at the results.
Growth ticked up
Nike predicted last quarter that its U.S. segment would soon return to robust growth, and that's exactly what happened this summer. Sales gains accelerated to a 6% rate from 3% after the retailer flooded the market with new releases across its footwear and apparel categories.
The direct-to-consumer channel led the way higher in percentage terms, but Nike's retailing network was even more important to the business. Executives said in a conference call with investors that they still see physical shopping as a key channel going forward, and they highlighted partnerships with Foot Locker and Nordstrom as standouts for delivering good shopping experiences.
The Chinese market far outpaced all of Nike's other segments while notching its 17th consecutive quarter of double-digit gains. Yet its growth rate dropped from 35% last quarter to 20% over the summer months. Stepping back, Nike's 10% global revenue boost was still a bit higher than management had forecast.
Getting more profitable
Nike's marketing expenses outpaced revenue growth, as expected, due to costly branding events like the World Cup. The company also had to contend with rising input costs. But profitability still improved: Gross margin ticked up to 44.2% of sales from 43.7% a year ago.
Three trends supported that growth. The most important was Nike's packed release calendar that lifted selling prices through innovations in footwear platforms like Nike Air. The company also got help from a shift toward those direct-to-consumer sales that are twice as profitable as wholesale sales. And finally, the company benefited from the fact that lower inventory in the industry reduced pressure to cut prices.
Not a sprint, but a marathon
All of those positive trends should continue lifting results over the next few quarters, and so CEO Mark Parker and his team affirmed a full-year outlook that calls for revenue growth of close to 10%, which would be a solid acceleration over last year's 6% increase. Gross profit margin is still expected to inch higher after dropping in each of the last two fiscal years.
That updated prediction came with two things for investors to keep in mind. First, Nike is noticing elevated volatility in foreign exchange rates and in the broader global trade environment. As a result, its reported numbers might drift toward the lower end of its guidance, executives said.
Second, Nike is planning to keep building out its direct-to-consumer segment, both through its own improved supply chain, marketing, and data analytics capabilities and through acquisitions like the recent Zodiac and Invertex purchases. These moves will require significant cash outlays that go well beyond the current fiscal year. "There is no finish line...as it relates to digital," CFO Andy Campion told investors.
On the bright side, Nike's uniquely global scale, combined with its strong earnings profile, give it flexibility to make more aggressive growth investments than any of its peers could manage. In that context, the best news about this quarter's big sales and profit gains is that they provide extra resources that the company can direct toward achieving its long-term goals.
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