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What Could Drive Nike’s 2Q18 Top Line?

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What’s behind Nike’s slower growth in North America?

Nike (NKE), the world’s largest apparel company, has had sales of $34.3 billion over the last 12 months. It derives 45% of its total sales from North America, its single-largest market.

However, Nike’s North American sales have declined over the last several quarters. Revenue from this geographic segment contracted 2.6% during fiscal 1Q18. That compares to an average increase of 10% between fiscal 2014 and fiscal 2016. Rising competition, especially from its German rival Adidas (ADDYY), is among the primary reasons for the slowing growth.

While the Nike brand continues to dominate the US market with a 37% market share, Adidas overtook the Jordan Brand (also owned by Nike) to reach the number-two spot in September.

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International markets remain strong

Nike’s international sales continue to show strong momentum. Western Europe, Emerging Markets, and Greater China posted double-digit growth in all four fiscal quarters of 2017. Fiscal 1Q18 was also a strong quarter for its international markets.

Management expects the strong momentum to continue throughout fiscal 2018. North American headwinds could cool down, at least in the short term.

Total sales are thus expected to increase at a mid-to-high single-digit rate in fiscal 2018 as positives in the overseas markets outweigh the negative impact of slowing North American sales.

For fiscal 2Q18, management expects a low single-digit increase in the company’s top line. Again, contraction in North American sales is likely to be more than offset by strong international growth. Nike will be reporting its fiscal 2Q18 results on December 21, 2017.

Investors seeking to add exposure to NKE can consider the Consumer Discretionary Select Sector SPDR ETF (XLY), which invests 3% of its portfolio in NKE.

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