Nike: Key Factors To Interpret The Better-Than-Expected Results

| About: Nike Inc. (NKE)
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Summary

NKE announced its 2Q15 results with EPS $0.74, beating the estimate by 5.7%. Revenue totaled $7.4bn, comfortably ahead of forecast by 3.5%.

Europe and Greater China contributed the highest growth rates over all segments.

The company reported 45.1% gross margin, driven by the product mix adjustment and DTC business model.

Financial Summary

Nike, Inc. (NYSE:NKE) announced its 2Q15 results with EPS $0.74, up 25% from a year earlier and comfortably ahead of the $0.70 forecast by 5.7%. Revenue jumped 15% to $7.4bn and net profit rose 23% to $655million. That beat the consensus estimate, which had forecast revenue of $7.15bn. Shares went up 2.7% and closed at $97.08 after the earnings release as the market maintains a strong positive attitude towards the company's product strategy and profitability.

Key Factors Update

Europe and Greater China led the growth. According to the conference call, Western Europe and Central & Eastern Europe reported 24% and 25% growth on a constant-currency basis, to reach $1,312million and $346million, separately. Similarly, Greater China also witnessed a strong performance over this quarter. The revenue totaled $758million, up 21% from the same period a year earlier.

Footwear championed growth rate in all markets. In this quarter, the footwear witnessed a high double-digit growth in all divisions, especially in Central &Eastern Europe and China, which soared 32% and 30% from a year earlier, separately. Given the strong commentary from its channels, it seems that the company would be able to deliver a solid growth in this division over this fiscal year.

Brand influence remains robust. NKE saw its gross margin climbed 1.2% to 45.1% over this quarter. The main driver behind the consistent growth is the strong brand power. Without solid brand image, adjusting product mix to include higher margin products may need more effort, in my view. Also, by shifting from wholesale to Direct-to-Consumer (DTC), the company has benefited not only from a higher margin business model but from the improvement of inventory control. It is the strategy that allows the company to maintain its brand power in a long run.

New products allow the company to serve customer needs better. NKE reported its SG&A up 17% to reach $2.4bn, mainly driven by the demand creation expenses, such as new product launches, digital brand marketing and consumer events. Given the long term benefits from the new product innovation, however, the company maintains its momentum by tailoring its products to meet the constantly changing customer needs. NKE intends to leverage the data it collected from customers in conjunction with its patents to build a long term competitive advantage, in my view.

However, weak growth in orders raised my concerns. According to the release, the company mentioned that the worldwide future orders from December 2014 to April 2015 were 7% higher than the same period of last year. But the future orders still rose at its slowest pace in the last four quarters, which may indicate the weakening demands from some segments, such as Japan and Emerging Markets, which reported the future orders would decline 4% and 3%, separately.

In conclusion, although the weak growth in orders may speaks the future stress from demand side, the company still maintains as one of my top choices given its 1) healthy margin growth from product mix and DTC model, 2) appropriate investment in product innovation and 3) strong brand influence in key sportswear categories. Shares of NKE have risen 27% over the past one year, beating S&P by 11%.

Source: Google Finance

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