Nike (NKE 83.42, -1.37, -1.62%) is trading lower today after reporting 1Q19
(Aug) results last night. EPS rose 18% year/year to $0.67 while revenue rose
9.7% year/year to $9.95 bln. Both results were ahead of market expectations. Revenue
for its flagship NIKE Brand were $9.4 bln, up 10% on a currency-neutral basis.
Specific highlights include double-digit revenue growth internationally and 6% growth in North America. NIKE Digital rose by 36% during the quarter, leading the way for differentiated retail, and Nike saw acceleration in both its Sportswear and performance businesses. Contributing to that double-digit international revenue growth was a particularly strong showing for the Converse brand in Europe and Asia; total revenues for Converse rose 7% year/year on a currency-neutral basis to $527 mln. Meanwhile, in spite of higher production costs, gross margin increased 50 basis points to 44.2% primarily due to higher average selling prices, favorable full-price sales mix, and margin expansion in NIKE Direct.
On the call, Nike noted that because consumer tastes are shifting faster, it's incumbent on Nike to continually bring fresh products to market. Nike sees several of its products, including Nike Air and React, as being capable of meeting consumer tastes and driving growth in a shifting environment. Consumers are drawn to their comfort and performance, and consumer interest in increasing available style options signals the brands’ popularity. VaporMax and 270 are both indicating that there is still vast growth potential in Nike Air as the company develops more comfort innovation in new forms.
This spring, Nike is taking the exaggerated AIR seen in the Air Max 270 and taking it a step further with the introduction of the Air Max 720, a distinctly NIKE product planned to launch in early 2019. This new platform, says NIKE, is engineered for maximum comfort, for “cradling the entire foot.” They went on to say that NIKE React is a great example of how the company has capitalized on the appeal of performance innovation and scaled it into Sportswear. The React Element 87 is considered one of the industry's top new designs, and Nike has applied the comfort of React cushioning to more performance and lifestyle shoes at several price points.
Nike also noted that its ZoomX continues to power the world's fastest runners, including Eliud Kipchoge during his world record-smashing run at the Berlin Marathon this month. This quarter, Nike took the “magic” of the Vaporfly 4% and merged it with an iconic running shoe, creating the Peg Turbo. Nike says the launch created incredible energy for the whole Pegasus franchise and helped lead the overall Running business to solid growth this quarter.
One of its most versatile and ever-advancing platforms is Flyknit. Digital knitting techniques have allowed Nike to refine and customize the breathability, stretch, and support elements incorporated in its product designs. In Basketball, for example, the KD 11 and the LeBron 16 each leverage specific yarns and different knit structures to match individual athlete needs. The LeBron 16, with its Battleknit 2.0, has had a great early read with consumers, both men and women.
As part of its broader commitment to scale sustainable platforms, Nike is expanding NIKE Flyleather through iconic styles like the Air Force 1, Cortez, and Air Max 95. Flyleather is a material that looks and feels like premium leather, but is lighter, more durable, and more sustainable. It uses at least 50% reclaimed leather and helps eliminate waste. Also,in the coming year, for the first time ever, Nike will bring digitally-powered adjustable footwear to professional sports.
Moving beyond footwear, Nike says its apparel segment continued its momentum with 11% growth, driven by fleece tops and bottoms, jackets, and pants. It delivered a number of Sportswear apparel collections over the last 90 days, like the City Ready and the Metallic Sheen collections in women's and NIKE Sport and Tech Packs and ACG.
Looking ahead, when looking across its complete portfolio of products, Nike still sees areas with significant upside. There is innovation opportunity in its women's categories, in products for young athletes, and in Jordan. A strong roster of core footwear at entry price points is equally important to NIKE's overall growth potential. Nike says it's not yet where it wants to be in core footwear, particularly in North America, but two priorities for the business are to develop innovation specifically for the core consumer and to better leverage pinnacle performance platforms, like Nike Air.
Turning to share buybacks, which is a key strategy for Nike, the company repurchased 17.8 mln shares in AugQ for approximately $1.4 bln as part of the four-year, $12 bln program approved in November 2015. As of August 31, 2018, a total of 167.2 mln shares have been repurchased under this program for approximately $10.1 bln. In June 2018, the Board of Directors authorized a new 4-year $15 bln share repurchase program that will commence upon the completion of the current program.
In sum, the stock is down modestly today despite the upside results. It appears that the gross margin may have been a bit below market expectations. Also, expectations had been rising heading into this report. The stock popped on its MayQ report in late June, and the stock has been trending nicely higher since then. So while this was a decent quarter, it seems investors were hoping for more upside.
- OUR VIEW
- LEARNING CENTER