Nike (NYSE:NKE) stock jumped 11% last week following its surprisingly strong fiscal fourth-quarter earnings results. Here are few big takeaways for investors from the announcement.
The U.S. business is stabilizing
Nike gets less than half its revenue from the domestic market. Compare that to Under Armour (NYSE:UA) (NYSE:UAA), which is dependent on the U.S. geography for over 80% of sales. That gap helps explain why Nike’s growth slowdown has been more modest as the U.S. market weakens.
The segment is still critical to Nike’s business, and so management was encouraged by improving operating results this quarter. Revenue inched higher, profits were up 5%, and gross margin rose. Inventory levels also came down 6% over the past 12 months, which means retailers are closer to matching their holdings to the slower pace of customer traffic.
In a conference call with investors, executives said they are still seeing heavy price cutting by the company’s retailing partners and expect no change in the shift toward online shopping.
However, Nike is excited about the growth opportunities tied to new product introductions. Their launch of the Air VaporMax shoe cushioning platform met solid demand this quarter and pointed the way forward for the company’s stacked pipeline of releases ahead. “If there was a question as to consumers’ appetite for performance innovation or willingness to pay premium prices for products that exceed their expectations in terms of performance and style,” Chief Financial Officer Andy Campion said on the call, “our launches in Q4 answered those questions.”
Digital sales are profitable
The direct-to-consumer business soared 18% for the full year thanks mainly to a 30% spike in e-commerce sales. It’s hard to overstate how bullish Nike’s management is about the long-term prospects for this channel. The division represents only about one-third of the overall business, executives explained, but it drove over two-thirds of the company’s growth this year.
As an example, they noted that sales transacted through Nike’s website produce roughly twice the revenue as comparable purchases in the wholesale business — with much higher profitability. That’s why the company is planning to double the direct-to-consumer business over time. The initiative might crimp growth results in the U.S. as the company shifts away from relying on its big network of physical retailing partners. On the bright side, though, Nike might achieve this shift without sacrificing profitability. This quarter, it plowed resources into building out its e-commerce infrastructure but still managed to lower overall operating expenses.
Growth powered by international markets
International segments powered Nike’s expansion this quarter, with China and Western Europe contributing double-digit sales growth. Like many consumer-facing companies, Nike is optimistic about a growing middle class in emerging markets like China. Per-person spending in these areas amount to only about 1/10 of the level Nike enjoys in richer economies, leaving a long runway for gains. “Over time,” Campion predicted, “macroeconomic drivers and consumers’ expanding passion for sport will create even greater capacity for the Nike Brand to grow in those markets.”
Nike’s 2018 outlook sees international markets leading the way again in fiscal 2018. The U.S. segment, responsible for 45% of sales today, should contract slightly over the next quarter or two as the company aggressively shifts its focus toward online selling.
Overall, Nike is projecting mid- to high-single-digit growth — right on pace with the past year’s 8% improvement and not far from the 11% boost that Under Armour is targeting.
And, in contrast with its smaller rival, gross margin is forecast to rise substantially thanks to moves toward higher-value direct sales and an intense product release pace that should meaningfully boost average selling prices. Nike’s reorganization project will push expenses up a bit at the start of the year, executives warned, but the company is still aiming for healthy profit growth as adjusted earnings rise by double digits in fiscal 2018.
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.
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