Nike Earnings Preview: Growth Strategy Is Powering Stock Higher
Investing.com | Dec 18, 2019 04:41
* Reports Q2 2020 results on Thursday, Dec. 19, after the close
* Revenue expectation: $10.08 billion
* EPS expectation: $0.58
Nike (NYSE:NKE) shares have soared 33% in 2019, despite the lingering worries about global trade and economic slowdown, a performance that suggests the sportswear giant is doing many things right. The stock's turbo-charged rally will face a major test tomorrow when the company releases its fiscal 2020 second-quarter earnings.
So far this year, there's been little cause for worry about how Nike is pursuing its growth strategy. At the forefront of the company's efforts is its “Triple Double Strategy,” which means doubling its resources on its digital properties; accelerating innovation and product creation; and deepening one-to-one connections.
The difference between Nike and its competitors is that the company has built a strong track record of delivering on its strategy. Nike has topped quarterly earnings estimates more than 90% of the time over the past 11 years, during a period when online disruptors, such as Amazon.com Inc (NASDAQ:AMZN) gained a major share of consumer spending.
The Nike brand has become a powerful, statement name, whose sports shoes and clothing ranges are now worn everywhere, and not just in the gym or on the soccer field. As a result Nike is grabbing a greater market share from its main European rival, Adidas (OTC:ADDYY), even in its home market, while outperforming in the major growth markets of Asia.
h2 Surging Online Sales/h2For example, in its last earnings report, Nike showed that sales in China surged 27%, excluding currency effects, despite the escalating trade war that, technically, should hit American brands in the communist nation hard.
Going forward, the big question is how fast a company which sells shoes and apparel can grow. Surging to a record high of $100.17 on Tuesday, before closing at $99.65, Nike’s shares trade at about 29 times expected earnings, which compares very well with about 19 for the broader S&P 500.
To justify that valuation, Nike will have to show that its run of extremely positive earnings will continue and it has what it takes to gain further market share.
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One major area where Nike has excelled is in its online strategy, which is helping to cut costs, boost sales and expand its margins. Nike’s digital sales rose 42% from a year earlier in the first quarter, after increasing by 35% in the last fiscal year. In Q1, they expanded across all regions with North America posting a 30% gain, Europe, the Middle East and Africa saw a double digit increase, with Asia Pacific and Latin America rising 50% and China jumping over 70%.
Nike’s push to capture women's business is another area where it’s succeeding. In the previous earnings report, Nike posted strong sales to women, reporting double-digit growth in that category.
In assessing the company’s biggest long-term opportunities, Chief Financial Officer Andy Campion listed women first, followed by apparel, digital and international. Many analysts believe that these initiatives and strategic investments, particularly in digital, should help Nike's evolution to producing sustainable, high single-digit growth and margin expansion.
Bottom Line
The strength in the company’s gross margins shows Nike’s strategic initiatives are transforming the sportswear giant into a high margin business. In addition, Nike is a solid dividend-paying stock offering a quarterly payout of $0.245 after an 11% hike last month, bringing the yield to around 1%. The company’s strong growth momentum and expanding income stream make this stock a suitable buy-and-hold candidate for long-term investors.
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