Why Nike Stock Rose after Its Q1 Earnings

  • Nike posted stronger-than-expected results for the first quarter of 2020.
  • The margins were better than management’s expectation.
  • The second-quarter outlook remains solid.
  • Analysts raised the target price on Nike stock after its first-quarter earnings.

Nike (NKE) posted better-than-expected first-quarter results after the markets closed on Tuesday. The company’s revenues and earnings beat analysts’ estimates. Notably, Nike’s top and bottom-line growth were impressive. The company faced tough YoY (year-over-year) comparisons.

Broad-based growth across all of the geographies, led by NIKE Digital, drove the company’s first-quarter revenues. The margins also beat management’s expectation, which boosted investors’ confidence.

Nike’s bottom line returned to growth. Strong double-digit EPS growth lifted investors’ sentiment. Nike’s earnings benefited from a lower effective tax rate and share repurchases.

We expect Nike to sustain the growth momentum in upcoming quarters, which should support its stock. Also, several analysts raised their target price on Nike stock, which could drive the shares higher.

Nike’s management expects to sustain the growth momentum in upcoming quarters. In the second quarter, Nike expects its revenue growth to be similar to the first quarter. Nike’s gross margin will likely expand by 25 basis points. The company’s margins might still be pressured due to tariffs and a shift in the timing of investments.

Nike’s revenues will likely mark high single-digit growth in the fiscal year. Meanwhile, the gross margin will likely expand by 50–75 basis points.

Nike stock rose 5.5% in after-hours trading following its stellar first-quarter results and healthy outlook.

Nike’s first-quarter earnings 

The company posted revenues of $10.66 billion, which beat analysts’ estimate of $10.44 billion and increased 7.2% YoY. On a constant currency basis, Nike’s revenues rose about 10%. The revenues from the company’s namesake brand rose 10% YoY on a constant currency basis led by NIKE digital. By product categories, Sportswear and the Jordan Brand posted stellar growth. Meanwhile, footwear and apparel continued to mark healthy gains.

Converse’s revenues increased 8% YoY on a currency-neutral basis led by double-digit growth in Asia. However, weakness in the US remained a drag.

By geographies, Nike’s sales in North America rose 4% due to growth in the digital channel. In the first quarter, NIKE Digital increased more than 30% on a constant-currency basis. The revenues rose 12% on a currency-neutral basis in the EMEA region led by the digital channel. Nike’s revenues in Greater China rose 27% YoY on a constant-currency basis. The company’s revenues have increased at a double-digit rate in Greater China in the last 21 quarters.

The gross margins expanded by 150 basis points and beat management’s expectation. The growth in NIKE Direct and full-price sales drove the company’s gross margin. Also, the shift in the timing of the supply chain and other investments supported the gross margin rate in the first quarter.

Higher sales and improved margins cushioned Nike’s bottom line. Meanwhile, a lower-than-expected effective tax rate boosted the company’s EPS. The effective tax rate was 12.4% in the first quarter compared to 14% in the same period the previous year. Notably, the effective tax rate was lower than management’s guidance range of mid-to-high teens.

Besides a lower effective tax rate, the lower outstanding share count supported the company’s bottom line.

Analysts raised Nike’s target price 

Stronger-than-expected first-quarter results and the healthy fiscal outlook led several analysts to increase their target price on Nike stock. Cowen increased its target price on Nike stock to $103 from 100, while Evercore ISI raised its target price to $150 from $120. Credit Suisse has a target price of $105—up from $97. Meanwhile, Jefferies raised its target price to $97 from $80.

Analysts have a consensus target price of $97.41 on Nike stock, which implies a potential upside of 11.7% based on its closing price of $87.18.