Nike (NKE) Earnings: Bulls Win, What’s Next?

Apparel giant Nike (NKE) managed to report robust fiscal second-quarter numbers that smashed expectations out of the water. What was a big hotspot for the company appears to be digital investments like the SNKRS app, the membership program, social media, single-view inventory and augmented reality. Overall, Digital growth grew 41%.

Evercore ISI Omar Saad says this digital expansion is just a glimpse of what the company could deliver in the coming years, keeping in mind NKE’s management suggests the digital department could grow well over the 30% target for 2023 and even represent the majority of sales over time.

Revenues for Nike increased by 10% up to $9.4 billion dollars while the gross margin increased 80 basis points to 43.8%, which is thought to be due to a higher average selling price and margin expansion in NIKE Direct.

“Regardless of where macro sentiment is headed, we think Nike’s second quarter results illustrate the power of Nike’s recent transformations made across: 1) digital (SNKRS app, Nike+, single-view capabilities enabled by migration of all systems to the cloud); 2) distribution (away from traditional wholesale and towards DTC); and 3) product innovation (80% of ytd growth driven by new platforms like VaporMax, Air Max 270, React, and ZoomX). We were also fascinated by management’s clarification on the call that the 30% digital penetration targeted for 2023 will be just one milestone in an ultimate march towards an eventual majority-digital business as digital continues to beat expectations,” Saad explained.

Saad says he was pleased to hear management go into detail over the 2019 product pipeline, which includes brand new Air Max 720s coming out in the spring, a second edition of Epic React also coming out in the spring, Vapormax and Air Max 270 – just to name a few. Another plan for the upcoming year is to create more accessible price points for shoppers.

“We are increasingly confident given the clean inventories/channel, strong DTC and digital momentum, and faster, more datadriven product design process, that NKE will be able to sustain its momentum in FY19 and FY20 even amidst a choppy macro backdrop. We are raising our FY19 EPS estimate to $2.65 from $2.60 and our FY20 EPS estimate to $3.20 from $3.10 to reflect stronger sales and gross margin assumptions, which should more than offset the stronger US dollar impact,” Saad said.

All in all, Saad holds a Long position for Nike stock. (To watch Saad’s track record, click here)

TipRanks found many analysts on the Street have been stepping in to offer their opinions on Nike stock in the past few months. Out of 26 surveyed, 16 are bullish and 9 are sidelined with just 1 bearish. The consensus price target of $86.52  shows a potential upside of just under 20%. (See NIKE’s price targets and analyst ratings on TipRanks)

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