What Fueled Nike’s Big Earnings Beat?

Nike (NKE) posted stronger-than-expected second-quarter earnings after the markets closed on Thursday. The company’s revenues and EPS beat Wall Street’s estimates by a significant margin.

Nike’s impressive Q2 earnings

We’re impressed with Nike’s second-quarter top and bottom-line growth. Notably, the company was up against tough YoY (year-over-year) comparisons. Planned investments were expected to limit the company’s EPS growth. Also, Nike’s sales and earnings growth accelerated sequentially, which is encouraging.

As expected, broad-based growth across all of the geographies drove Nike’s top-line growth. NIKE Digital and innovation continued to drive the company’s revenues.

Nike managed to expand its gross margins. However, the company fell short of management’s expectations as tariffs and supply-chain investments remained a drag.

Despite lower-than-expected gross margins, Nike’s bottom line had strong growth. A considerable decline in the effective tax rate and the lower average share count drove stellar growth in Nike’s bottom line in the second quarter.

In comparison, Lululemon (LULU) also beat analysts’ estimates during the last reported quarter. Digital transformation, premium pricing, innovation, and geographical expansion continued to drive double-digit sales and EPS growth. Under Armour (UAA) also beat analysts’ estimates during the last reported quarter.

Q2 sales beat the consensus estimate

Nike posted revenues of $10.36 billion, which beat analysts’ consensus estimate of $10.09 billion. The revenues rose 10.2% YoY. Balanced growth in NIKE Direct and wholesale channels supported the top-line growth. Nike Direct’s revenues grew 17% on a currency-neutral basis, which reflected 38% growth in NIKE Digital.

Nike Brand revenues rose 12% YoY on a constant-currency basis, which reflected growth across footwear and apparel.

By categories, sportswear, running, and the Jordan Brand sustained momentum and continued to grow at a brisk pace. Converse revenues increased 15% YoY on a currency-neutral basis with double-digit growth in Asia and Europe.

By region, the revenues grew 5% in North America, which reflected 32% growth in NIKE Digital. North America sales benefited from a stellar Black Friday performance. By channels, NIKE Direct continued to fuel the growth. Meanwhile, wholesale sales gained from partners including Foot Locker, Dick’s Sporting Goods, JD, and Finish Line.

In the EMEA region, the revenues grew 14%, which reflected strong growth in its namesake brand. Most of the categories registered double-digit growth.

The APLA region’s sales increased 18% YoY. Korea and Japan registered robust growth.

Nike’s revenues in China continued to grow at a double-digit rate. Notably, Nike’s revenues in China have increased at a double-digit rate for the past 22 consecutive quarters. In the second quarter, Nike’s revenues in Greater China rose 23% YoY on a currency-neutral basis. Notably, each category marked double-digit growth.

NIKE Digital sales increased more than 44% in China, which reflected strong Singles’ Day sales. The launch of the NIKE app and strategic partnerships with Tmall and WeChat could boost digital revenues in the coming quarters.

Nike’s earnings crushed the estimate

Nike’s earnings beat Wall Street’s expectation. The company posted an EPS of $0.70, which rose 34.6% YoY and beat analysts’ estimate of $0.58 by a wide margin. Margin expansion, increased sales of higher-margin direct-to-consumer business, and the lower effective tax rate drove the EPS growth. Also, share repurchases cushioned the bottom line.

Nike’s gross margins increased by 20 basis points, which reflected higher average selling prices and growth in NIKE Direct and Converse. However, higher product costs due to tariffs and supply-chain investments remained a drag.

The effective tax rate was 10.7% compared to 15% in the same quarter the previous year. Meanwhile, the average share count fell by 2%.

Guidance

Nike expects to sustain the momentum in the third quarter. Management expects the third-quarter revenues to increase at a high-single-digit rate. However, the gross margin will likely stay flat or decline slightly. Benefits from higher pricing and direct sales will likely drive the margins. However, tariffs and investments in the supply chain could continue to hurt.

Analysts raised the target price

Nike’s impressive second-quarter performance led several analysts to raise the target price on its stock. J.P. Morgan increased the target price to $110 from $109. Susquehanna raised the target price to $115 from $106. Meanwhile, Piper Jaffray increased the target price to $110 from $101.

Analysts have a consensus target price of $106.83 on Nike stock, which implies an upside potential of 5.6% based on its closing price of $101.15 on Thursday.