Led by a continued resurgence in North America, accelerated growth in China and continued gangbuster digital growth, Nike reported Q2 earnings and sales easily topped Wall Street’s targets and lifted its guidance for the year.

Highlights:

  • Revenues for Nike Inc. increased 9.6 percent to $9.4 billion and grew 14 percent on a currency-neutral basis. Wall Street’s consensus estimate had been $9.17 billion.
  • Revenues for the Nike Brand were $8.9 billion, climbing 10.0 percent overall and up 14 percent on a currency-neutral basis. The currency-neutral gains were driven by accelerated growth across all geographies and in Nike Direct, led by a 41 percent hike Nike Digital. Revenue grew in nearly every key category led by sportswear with well-balanced double-digit growth across footwear and apparel globally.
  • Gross margin increased 80 basis points to 43.8 percent versus guidance of 50 basis points expansion.
  • Net income increased 10.4 percent to $847 million, or 52 cents a share, beating consensus estimates of 46 cents.

On a conference call with analysts, Andrew Campion, CFO, said the strong performance stems from its Consumer Direct Offense initiative that’s backed by three programs: 2X Innovation, 2X Direct and 2X Speed with a key focus on 12 key cities and ten key countries.

On innovation, he noted that while innovation platforms are projected to drive over 50 percent of its incremental growth over the next 5 years, new innovation platforms, including Vapor Max, Air Max 270, React and ZoomX have driven over 80 percent of its incremental growth this year. More-timely updates are amplifying growth for “Power franchises,” such as Air Force 1 and the Air Jordan 1.

The Direct push is being driven by a goal to have Nike Direct and partnered Nike experiences, physical and digital, contribute over 50 percent of incremental growth and outpace undifferentiated retail over the next five years. That goal was led again in Q2 by a 41 percent gain on a currency-neutral basis in Digital. Over half of its digital commerce revenue is coming from mobile, underscoring how Nike is looking to ”drive deeper, more organic, one-to-one engagement,” said Campion.

The Speed initiative is reflected by efforts to cut turnaround times in half. Nike’s Express Lane rapid-turn program is growing double digits and now represents a double-digit percentage of its total business. Said Campion, “This is significant as Express Lane product also largely sells through at full price, favorably impacting margins

“In short,” Campion said, “we are very pleased with our strategic execution and the strong performance we have delivered to date. That said, more importantly, we are confident in the sustainability of our growth going forward.

“While FX headwinds have intensified, we now expect stronger currency neutral revenue growth in fiscal year ’19 than previously planned. And as we’re beginning to gain greater insight into fiscal year ’20, we’re seeing continued strong demand.”

North America Momentum Picks Up

In the North America region, sales rose 8.5 percent on a reported basis to $3.78 billion and grew 9 percent on a currency-neutral basis.

The quarter marked an acceleration of growth from the fiscal first quarter, when revenues first bounced back with a 6 percent gain on a currency-neutral basis after sliding for four straight quarters. Sales on a currency-neutral basis were down 2 percent in Q418, 4 percent in both Q318 and Q218 and 3 percent in Q118.

Operating earnings in the region in the latest quarter rose 12.9 percent to $884 million.

The top-line driver was Nike Digital, up over 30 percent; with Nike Direct, including online and stores, ahead high-single digits.

At the Direct business, a highlight of the quarter was the opening of the Nike Live concept on Melrose, where Campion said Nike is “aligning data-driven, bi-weekly flow of the product to the store with digital storytelling and one-to-one connections between the store team and local consumers.”

The store, according to Campion, is driving strong digital member acquisition, engagement and buying. Nike is seeing “even more impressive early results” at its new House of Innovation in New York. That concept includes the ability to scan barcodes to check availability, instant check out without requiring a register, expert studio that gives personal guidance, and special unlocks and notifications as shoppers enter the store.

The North America performance was also helped by the launch of a Just Do It campaign in early September with a heavy focus on the launch of the NBA season that “reignited brand heat” in the region.

Also encouraging was that wholesale growth resumed. Said Campion, “While the overall retail marketplace in North America is still going through consolidation, and we do expect that to continue, our Nike wholesale business in aggregate has returned to strong growth with improving profitability, led by our strategic retail partners, such as Foot Locker and increasingly JD.”

Finish Line was acquired by UK-based JD Sports earlier this year to mark its entry into the U.s.

Campion concluded on the region, “We see our brand heat across both Nike and Jordan, our strong pipeline of innovative product, and digitally-led consumer experiences continuing to fuel strong growth in North America.”

Nike Taking “Significant” Market Share In Europe

In the Europe, Middle East & Africa (EMEA) region, Nike Brand sales were up 8.4 percent to $2.31 billion and gained 14 percent on a currency-neutral basis. Operating income reached $450 million, a gain of 33.5 percent.

The 14 percent currency-neutral gain marked an acceleration from a 9 percent increase shown in Q1. The gains were driven by strong growth across sportswear, running, training and Jordan. By channel, Nike Digital again led the growth, growing over 30 percent

“We have extraordinary momentum in this geography as we’re taking significant share and we’re growing the market,” said Campion. “We are mindful of the geopolitical dynamics in Europe. That said, we have a long track record of delivering growth and profitability amidst a wide range of macroeconomic circumstances. As we look ahead, we expect our momentum to continue in Europe.”

Indeed, Campion said that in the five key cities it’s targeting in the EMEA, consumers rate Nike as “the number one cool and number one favorite brand” and those rankings strengthened even further in Q2. Campion said, “We’re connecting more directly and deeply with consumers locally through our key city focus and we’re seeing the impact globally.”

As an example, he said Jordan’s collaboration in Paris with PSG (Paris Saint-Germain) sold out at launch around the world. Also feeding momentum was the introduction of the Nike App at retail in Niketown London as well as the SNKRS Pass in Paris, allowing consumers to reserve launch shoes and pick-up in store. Said Campion, “Those services are removing friction and personalizing the shopping experience, driving significant new digital member acquisition in two of our key cities”

Strong China Growth Showing No Impact From Trade War

Greater China’s revenues for Nike Brand jumped 26.4 percent to $1.54 billion and grew 31 percent on a currency-neutral basis. Operating income rose 48.4 percent to $561 million year-over-year.

The period marked the country’s 18th consecutive quarter of double-digit revenue on a currency-neutral basis and notable improvement on the 20 percent currency-neutral gain seen in Q1.

The gains were driven by Digital growing over 40 percent. One milestone on the Digital side is that the SNKRS App community in China, which launched last year, is already the same size as Nike Brand’s SNKRS community in North America. Similar to the U.S., the opening of the House of Innovation in Shanghai has seen “extraordinary” results so far.

Campion also noted that the Nike is not seeing “any impact on our business” from contentious U.S and China tariff negotiations.

“Nike continues to win with the consumer in China,” said Campion. “For over 3 decades, Nike has been a Brand of China for China. We have connected deeply with the consumer here through our key city focus on Shanghai and Beijing through partnerships with sports federations, teams and athletes and by partnering with China’s Ministry of Sport to fuel greater sport participation in schools throughout China.”

For instance, he noted that in November, leading up to the Shanghai Marathon, Nike took Eliud Kipchoge, the world marathon record holder, on a tour of Shanghai and other key cities. On Marathon Day, a Shanghai-focused Just Do It campaign was launched and the video watched more than 16 million times within 24 hours.

Said Campion, “We are bullish about our potential to continue delivering strong, sustainable, and very profitable growth in this important geography.”

APLA Boasts 75 Percent Digital Growth In Q2

In the Asia Pacific & Latin America (APLA) region, sales for Nike Brand advanced 2.0 percent to $1.3 billion while jumping 15 percent on a currency-neutral basis. Operating profits rose 10.3 percent to $321 million.

The performance was fairly close to the 14 percent currency-neutral gain seen in Q1. Balanced double-digit growth was seen across footwear and apparel, as well as double-digit growth in sportswear, Jordan and basketball.

Nike Digital is accelerating in APLA, with revenue growing over 75 percent in Q2. Campion said Nike continues to expand its digital connectivity to consumers across this region through partnerships with Zozotown, Flipkart and others.

Said Campion, “APLA is also a market in which we are being extremely entrepreneurial, testing new concepts that leverage digital to enhance the consumer experience at retail.”

As Nike noted in its first-quarter conference call, a Nike Live experience will be opening in Tokyo in Q3. A “Connected Inventory” strategy is being tested in Seoul with inventory connecting across 19 Nike-branded doors, including doors owned by two wholesale partners. Said Campion, “This connected inventory pilot has yielded very promising early results serving thousands of consumers whose demand would otherwise have been unmet due to product being out of stock in a particular store.”

Wholesale Channel Challenges Holds Back Converse

Converse’s revenues gained 4.2 percent to $425 million and moved up 6 percent on a currency-neutral basis. Operating earnings declined 8.3 percent to $44 million.

The gains – slightly lower than the 7 percent currency-neutral gain seen in Q1 – were driven by strong double-digit growth in Asia and a sharp acceleration in Converse’s own Digital growth globally, approaching triple digits.

Said Campion, “While Converse wholesale in the U.S. and U.K. remain challenged in Q2, Digital also accelerated in those markets. We see significant opportunity to grow Converse by expanding the product portfolio, including within basketball as well as launching a new digital platform.”

On Friday, Nike announced that G. Scott Uzzell will become president and CEO of Converse, effective January 22. He was president, Venturing & Emerging Brands Group (VEB) at The Coca-Cola Company. He will replace Davide Grasso, who is retiring at the end of this calendar year.

Meatier Margins Help Drive Earnings Beat

Gross margins expanded 80 basis points to 43.8 percent, primarily driven by higher average selling prices and margin expansion in Nike Direct, partially offset by higher product costs.

SG&A increased 14 percent to $3.1 billion, increasing as a percent of sales to 33.5 percent versus 32.4 percent. Demand creation expense was $910 million, up 4 percent primarily driven by higher advertising and marketing expenses. Operating overhead increased 18 percent, reflecting investments to support its accelerated Nike’s digital transformation.

Overall EBITDA grew 13.3 percent to $1.0 billion. Net earnings rose 10.4 percent to $847 million, or 52 cents a share.

As of November 30, inventories were up 1.2 percent despite the 14 percent currency-neutral top-line growth due to strong demand for key franchises and a lower mix of closeout across all geographies.

“Outsized” Growth Opportunities: International, Digital, Apparel, Women’s

Campion elaborated on the four areas the company views as “outsized opportunities” for growth:

  • International: In international markets, the athletic segment of the overall footwear and apparel market has historically been less penetrated than in the U.S., “but that is changing fast.” Sports participation and the related culture around sports continues to accelerate in international markets, he said, pointing to China as an example. Said Campion, “When sport grows, Nike grows.”
  • Digital: Nike predicted at last year’s Investor Day that owned and partnered online sales would comprise 30 percent of Nike’s business by 2023, up from roughly 15 percent currently. But Campion said the company is “already thinking bigger” long term. He believes the footwear industry has “lagged” many some other unmentioned industries at 50 percent digital penetration and projected to be over 80 percent digital by 2030. Said Campion, “We now see 30 percent digital penetration as just a milepost on our path to the majority of our business being digital.”
  • Apparel: Overall, apparel remains a larger market than footwear but athletic apparel accounts for a smaller percentage of apparel than athletic does within overall footwear. He implied the athleisure trend is driving a change. Said Campion, “Consumers are increasingly choosing performance and sportswear apparel for more occasions as it better serves their more active and expressive lifestyle.”
  • Women: Nike Brand women’s revenues were up 20 percent in both footwear and apparel in Q2 but women’s  remains less than a quarter of Nike’s revenue and is a larger market than men’s in both categories. Stated Campion, “Similar to the strong returns we are seeing from having doubled our investment in innovation, we see the potential for asymmetrical returns by editing and more aggressively shifting resources towards our women’s business.”

Outlook Heads North

Despite the “increasing volatility and uncertainty of late on a macro level,” Nike raised its guidance for fiscal 2019 due the quarter’s success and continuing momentum.

The update includes:

  • Currency neutral revenue growth is now projected to be in the high single-digit range, potentially approaching low double digits. Based on current foreign exchange rates, reported full-year revenue growth to be over 3 points lower than currency-neutral revenue growth and at the low end of the high single digit range. Previously, Nike similarly projected revenue growth at the lower end of high-single digit range;
  • Full-year gross margin expansion is expected to be roughly in line with the gross margin expansion of 70 basis points seen over the first half. Previously, margins were expected to increase 50 basis points or slightly greater;
  • SG&A for the full year is still expected to grow in the high single-digits as investments particularly continue to be made building digital capabilities.

For the third quarter, currency-neutral revenue growth is expected to climb in the high single-digit range. Reported growth is expected to be roughly 4 points lower. Gross margins are projected to be in in line with full-year guidance while SG&A growth is expected to be in the low double-digit range in Q3.

Image courtesy Nike