Can North America, China Drive NIKE (NKE) in Q1 Earnings?

NIKE Inc. NKE is slated to report top and bottom-line numbers for first-quarter fiscal 2020 on Sep 24. Investors are optimistic about the contributions of North America and China regions to the company’s results. Improvements in these segments along with synergies from the Consumer Direct Offense and gain in international and digital businesses are likely to drive top-line growth in the quarters ahead.

However, management has warned of softness in its earnings outcome, owing to adverse impacts of currency rates as well as higher SG&A expenses and tax rate.

Despite the soft view, the NIKE stock has been displaying strong momentum, with shares gaining 9.3% in the past month compared with the Consumer Discretionary sector’s 4.5% growth. Additionally, the stock has grown about 18.8% year to date, keeping it in investors’ good books.

With that said, let’s unwind on the potential of the company’s key segments and their likely contributions to earnings this time around.

Continued Growth in North America – Key Sales Driver

NIKE’s North America business has returned to growth in the past year, after a major downturn. It has been witnessing positive results since then. Notably, the segment reported revenue growth of 6% in the first quarter, 9% in the second quarter, and 7% in both third and fourth quarters of fiscal 2019. Continued growth in NIKE Digital and significant share gains across its wholesale partners are boosting the segment’s performance. Further, innovation in footwear and strong demand in apparel remain other growth drivers.

The company’s wholesale and NIKE Digital businesses witnessed double-digit growth in North America in the last reported quarter. Further, NIKE app revenues in North America are witnessing triple-digit growth. It expects the momentum in North America to continue in fiscal 2020 and beyond, driven by strong pipeline of innovative products, brand recognition and creation of digitally-led consumer experiences.

The company’s differentiated consumer experiences in North America through the rollout of the NIKE app in owned retail stores, and the testing of new services and concepts with retail partners, such as Foot Locker FL, Nordstrom JWN and DICK’S Sporting Goods DKS, should drive growth.

For North America, the Zacks Consensus Estimate for revenues in the fiscal first quarter is pegged at $4,349 million, which suggests growth of nearly 5% from the year-ago reported figure.

China Business Draws Attention

Despite the uncertainty surrounding the trade-war, NIKE’s China business seems to be gaining pace as consumers are increasingly adopting sports into their daily lives. The company has been a clear beneficiary of this trend, recording the 20th consecutive quarter of high-quality, double-digit revenue growth in China. In fourth-quarter fiscal 2019, constant-currency revenues improved 22% in Greater China, driven by strong performance at NIKE Direct. Notably, digital sales in the country were up 37% in the reported quarter. Further, growth was driven by broad-based strength across men’s and women’s performance category within sportswear.

Going forward, we expect the momentum in China to continue, backed the company’s focus on creating products specifically tailored to suit preferences of consumers in China. Further, NIKE is working to build digital experiences to connect with consumers through China’s unique digital ecosystem.

The Zacks Consensus Estimate for the company’s revenues in Greater China for the fiscal first quarter is pegged at $1,552 million, which suggests growth of 12.5% from the year-ago reported number.

Overall Business Trends

NIKE’s progress on the Consumer Direct Offense as well as growth in international and NIKE Direct businesses has been driving its performance. Consequently, the company has delivered strong top and bottom-line performances in the past few years. Notably, fourth-quarter fiscal 2019 marked the ninth consecutive quarter of sales beat.

NIKE continues to seek opportunities for increasing global footprint, popularity and market share. Apart from acquiring new brands, the company has been focusing on broadening its territory through growth of e-commerce and the NIKE Direct business. Further, continued growth in North America and international regions should boost NIKE’s revenues in the soon-to-be-reported quarter.

The Zacks Consensus Estimate for revenues of $10,449 million suggests an increase of about 5% from the year-ago reported figure. (Read More: Things You Must Know Before NIKE's Q1 Earnings Results)

Overall Earnings & Revenue Expectations

NIKE expects to continue investing in key capabilities to aid digital transformation and deliver robust growth in fiscal 2020 and beyond. Consequently, the company retained its initial guidance for fiscal 2020. It continues to expect high-single-digit revenue growth on a reported basis, suggesting improvement from the rise witnessed in fiscal 2019. Further, it anticipates delivering broad-based growth across all geographies, which should be within long-term targets.

For first-quarter fiscal 2020, the company expects revenue growth to be in line to slightly above the level witnessed in fourth-quarter fiscal 2019. On a currency-neutral basis, revenue growth is expected to be in a high-single digit.

Despite strong sales growth, adverse impacts of FX headwinds are expected to continue hurting the top line and margins in first-quarter fiscal 2020. This Zacks Rank #4 (Sell) company expects adverse currency rates to hurt currency-neutral revenues by 4 percentage points in the fiscal first quarter. Additionally, currency headwinds are expected to mar gross margin by 50-70 basis points (bps) in the fiscal first quarter.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Further, gross margin growth for fiscal 2020 is likely to be partly offset by currency headwinds, supply-chain investments such as RFID, and expansion of Air manufacturing innovation. These factors are likely to mar gross margin by about 50 bps.

Going forward, the company expects higher SG&A expenses and tax rate, which may impede bottom-line results. It expects only slight SG&A leverage in fiscal 2020 as gains from productivity initiatives will be partly offset by costs related to investments. For fiscal 2020, the company expects SG&A expenses to increase in line with revenue growth. Other expenses, net of interest expenses, are anticipated to increase $50-$100 million. Effective tax rate is expected to be in the mid to high-teens range. In the fiscal first quarter, the company expects SG&A expenses to increase in a high-single digit, in line with currency-neutral revenue growth.

The Zacks Consensus Estimate for the company’s earnings in the fiscal first quarter is pegged at 71 cents, indicating growth of nearly 6% from the prior-year period.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Foot Locker, Inc. (FL) : Free Stock Analysis Report
 
Nordstrom, Inc. (JWN) : Free Stock Analysis Report
 
DICK'S Sporting Goods, Inc. (DKS) : Free Stock Analysis Report
 
NIKE, Inc. (NKE) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research