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5 Things Nike, Inc.'s Management Wants You to Know


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When Nike reported its stellar fiscal first-quarter 2015 results a few weeks ago, investors were rightly rewarded with a quick 12% pop. Despite its already enormous size, the footwear and athletic-apparel titan had grown quarterly revenue by 15% during the past year, to $8 billion, which resulted in a 27% increase in net earnings, to $1.09 per share. Both figures trounced analysts' models, which had called for earnings of $0.88 per share on sales of $7.83 billion.

But, as the broader market subsequently pulled back, Nike stock has also given up a small chunk of its post-earnings gains:

NKE Chart

NKE data by YCharts.

I think now's a great time, then, to recap some of the things management told investors during their last post-earnings conference call.

One massive enabler of Nike's continued growth
In June, Nike CEO Mark Parker made it clear that Nike's growth was far from over, citing its outsized focus on understanding consumers as creating "tremendous untapped potential." But this time, Parker offered some additional insight into an even bigger force behind that growth: A globally expanding middle class. He explained:

The middle class is growing around the world, interest in sport continues to grow, and consumers are investing more and more in their own health and fitness. Apparel and footwear styles are becoming increasingly athletic. Because we know the consumer better than anyone else, we're able to leverage these developments to accelerate our growth.

As the middle class continues to expand -- especially in developing markets -- Nike is in a great position to introduce its brand through "demand creation" investments to prove worthy of their growing apparel and footwear budgets.

Nearly a third of all players in the World Cup wore Nike flyknit boots like this one. Credit: Nike.

The World Cup was great for Nike, but...
Nike saw demand creation costs rise 23% last quarter, to $897 million, largely thanks to its investments to foster enthusiasm surrounding the FIFA World Cup. Nike Brands president Trevor Edwards even called it a "tremendous success" for them, and offered color on another way Nike enjoyed exposure from the event:

The World Cup is a great example of how we harness the power of sport to deepen the relationship between consumers and the Nike brand. We introduced more revolutionary product innovations in this World Cup than in any prior, and we're proud of the fact that more players wore Nike boots on the pitch than all other brands combined. Nearly a third of those players wore Flyknit boots. That's amazing.

However, Edwards cautioned:

That said, the recent weakening of the Brazilian economy requires us to carefully manage the marketplace, to keep it healthy and productive for Nike and our retail partners. While we are not immune to macro conditions, we are focused on maintaining strong brand momentum and deepening consumer connections as we work to elevate the marketplace for continued growth.

Investors should keep an eye, then, on any negative effects in the coming quarters from economic weakness in young markets like Brazil.

Direct-to-consumer is still strong
Nike is also enjoying continued strength in its direct-to-consumer business, seeing expansion across all three DTC concepts including in-line, factory stores, and Nike.com. According to Parker:

[W]e're driving growth across an integrated marketplace. DTC revenues grew over 30% in the quarter, and our wholesale business grew double digits, reflecting strong growth in stores and online. I've said that becoming a better retailer would make us a better wholesale partner, and our Q1 results are only the beginning. 

Nike Brands president Trevor Edwards later elaborated that Nike Brand DTC revenue growth was driven by a combination of comparable-store growth of 15%, new store expansion, acceleration in online sales, and global futures growth of 14%. This strength is expected to continue in the coming quarters, which largely explains why management expects gross margin to expand by around 125 basis points for the year.

E-commerce growth is still accelerating
Within that DTC segment is e-commerce. Three months ago, during Nike's fiscal fourth-quarter 2014 call, management told us Nike's e-commerce business not only grew 40% in fiscal 2014, but that its growth also accelerated with each passing quarter. And according to Parker, e-commerce is still picking up steam:

We're employing new ways to engage consumers online as we create communities, services, and e-commerce experiences that fuel our growth strategies around the world. These strategies are strengthening our relationships with consumers and driving our business, as e-commerce revenues were up over 70% in the first quarter.

Over the long term, as the influence of e-commerce continues to rise, this is especially important, as it gives Nike an effective source of incremental high-margin sales.

China has turned the corner
Finally, investors have eagerly watched for signs of improvement from Nike's pending business reset in China, which "only" comprised around 10% of total sales last fiscal year. In fiscal Q4, currency-neutral revenue grew just 2% in China, even amid a 22% jump in comparable-store sales for the region.

Edwards noted that, while there's still room for improvement, this quarter was much better:

In greater China, we continue to see strength in the Nike brand and positive near term results from our actions to sharpen our product assortments and reset the marketplace. Revenues grew 20% in the quarter, led by 30% comp store growth in our own DTC doors. At the same time, partner doors that have been reset continue to outpace the reporting of the fleet, delivering greater productivity and profitability. As we continue to deliver innovative products and compelling experiences to consumers, and reset additional retail locations, we are confident we can deliver double digit long term growth in this key market.

China's consuming class is expected to grow to around 600 million by 2017 -- or roughly double the United States' current population. That bodes particularly well for Nike's growth prospects down the road.

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The article 5 Things Nike, Inc.'s Management Wants You to Know originally appeared on Fool.com.

Steve Symington owns shares of Apple. The Motley Fool recommends Apple and Nike. The Motley Fool owns shares of Apple and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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