Nike (NYSE: NKE) announced its Q3 2019 financial results on March 21, 2019 followed by a conference call with analysts. The company met analysts’ expectations for revenue while exceeding the earnings consensus estimate. NKE reported revenue of $9.6 billion in Q3 2019, about 7% higher than $9 billion in the year-ago period. On a constant-currency basis, revenue increased by 11% on a year-on-year basis. Higher revenue was a reflection of strong growth across wholesale, Nike Direct, categories across Sportswear and Jordan, continued double-digit growth across footwear and apparel, double-digit growth in Asia and digital, partially offset by declines in the US and Europe. Earnings came in at $0.68 per share in the third quarter, much higher than a loss of -$0.57 per share in Q3 2018. A sharp reduction in the tax expense following the implementation of the Tax Cuts and Jobs Act, coupled with higher average selling prices, led to a rise in margins and earnings for the quarter.
We have summarized the key announcements and our outlook for the company in our interactive dashboard – How did Nike fare in Q3 2019 and what is the outlook? In addition, here is more Consumer Discretionary Services data.
Key Factors Affecting Earnings
Digital Growth: On a constant currency basis, NIKE Digital achieved an impressive growth of 36% during the quarter. Both the SNKRS (sneakers) app – which sells limited-edition shoes using collaborations with athletes, celebrities and universities – and newly launched NIKE app are resonating strongly with consumers. For the quarter, SNKRS traffic and revenue were up triple digits, with 17 of the top 20 SNKRS launches having 100% sell through. Additionally, during the record-breaking Air Jordan 11 Concord launch, NKE’s digital ecosystem showed its ability to handle scale and drive unrivaled energy, processing on average 300 transactions per second. Also, consumers using the NIKE App average 40% higher sales than those who don’t. Nike Direct constituted approximately 28.6% of the company’s total revenues in 2018, with the share expected to go up to 30% in 2019 and 32% in 2020, along with mobile contributing more than 50% of Digital commerce revenue. We expect growth momentum in Nike Digital to continue with increasing digitization and Nike’s increasing investment in order to expand its digital ecosystem.
Women’s Business: Although the Women’s business growth rate outpaced Men’s business growth across geographies and achieved double-digit growth in the last couple of quarters, Nike’s Women’s business represents only 18.9% of the company’s total revenue. Given that women’s Footwear and Apparel market is estimated at 1.5x the men’s footwear market globally, Nike has tremendous potential to grow in this category. We believe that the upcoming Women’s FIFA World Cup 2019 is a golden opportunity for Nike, with the company recently unveiling 14 National Team Kits for World Cup, a tournament record for NIKE. We expect the share of women’s business to rise to 20% over the next two years.
Growth In Greater China: China earned its 19th consecutive quarter of high-quality, double-digit growth. Nike delivered 24% currency-neutral revenue growth in Greater China, led by NIKE Direct, with digital commerce up over 60%. China is Nike’s best performing geographical market, with it still having immense untapped growth potential. China is already the largest footwear and apparel market in the world, but athletic footwear and apparel represents a smaller share of the total than in more developed markets such as the US. However, within the broader market, athletic footwear and apparel is growing double digits in China, as sport has increasingly become more a part of life for consumers in China. Nike is taking a number of initiatives – like sponsoring the Shanghai Marathon, partnerships with the China Super League, and working with the Ministry of Sport to expand physical education in schools – to grow its brand in China. Nike is now more focused than ever on creating product specifically tailored to the Chinese consumers’ preferences and fit, and creating digital experiences that connects it more deeply to consumers through China’s digital ecosystem.
Higher Profits: Nike’s margins witnessed a sharp increase on a year-on-year basis, benefiting from a significant decrease in tax expense following the implementation of the Tax Cuts and Jobs Act. Additionally, margins also received a boost by higher average selling prices, favorable changes in foreign currency exchange rates, and growth in NIKE Direct, partially offset by higher product costs. For FY 2019 and FY 2020, we expect net income margin to increase to about 11% from 5.3% in FY 2018, which would in turn drive EPS growth over the next two years.
Nike’s triple-double strategy – 2x innovation, 2x direct, and 2x speed – is paying off, as evidenced by solid growth across footwear and apparel, driven by innovative platforms and strong owned and partnered digital channel over the last one year. We believe that this initiative will help the company record higher growth over the next two years. Increasing focus on digital platform, upcoming global sports events and increasing partnerships would likely lead to strong sales growth with revenue expected to grow to approximately $42 billion by FY 2020. Though the stock has declined post the announcement of Q3 results, mainly due to lower than expected growth in North America, we believe that growth potential and momentum for Nike in China and other emerging markets is expected to more than offset the saturation in North America with competition from the likes of Adidas and Under Armour. Along with organic growth, Nike has renewed its focus on enhancing shareholder returns. In Q3 2019, the company completed the four-year, $12 billion program authorized by the Board of Directors in November 2015 and commenced a new four-year, $15 billion share repurchase program which was authorized in June 2018. Thus, we believe that management’s focus on driving sales growth across categories and increasing profitability, coupled with steps taken to enhance shareholder returns, would help in providing support to NKE’s stock price.
We have a price estimate of $89 for the company’s share price, which is higher than its current market price.
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