Nike (NYSE: NKE) shares were 4% higher after hours following its better than expected second-quarter results. Some highlights were the company upping its forecast, strong online sales, and 24% sales growth in China.
Inside the Numbers
Overall, the coronavirus has been a net positive for Nike. Spending on formal and work attire has dropped, while it's increased for athletic and comfort wear. Similarly, athletic footwear sales have remained strong, while demand for formal footwear has collapsed.
Another positive is that Nike was able to heavily invest and realize significant growth in its online sales channel. Digital sales growth was 84%. Nike is increasingly shifting to becoming direct to consumer (DTC) brand, using its app to sell to customers. So, it's been heavily investing in its supply chains and has been building smaller Nike stores to serve as pickup spots for customers to pick up online orders.
However, the pandemic did affect Nike's overall sales as retail stores remain the company's primary sales channel. These stores have struggled with lower foot traffic due to the pandemic.
So, in its fiscal Q2, Nike reported $0.78 per share in earnings versus $0.62 expected. Revenue was $11.2 billion vs $10.6 billion expected. This was a 22% increase in EPS and a 9% increase in sales from 2019's Q2. In part, the earnings beat was attributed to decreased spending on marketing. It also offered fewer discounts due to higher than expected sales on Singles Day and Black Friday which led to less inventory.
As a result, Nike upped its outlook for the next two quarters. It expects revenue growth between 13 and 15%, beating analysts' expectations of 12.3%. It also expects higher earnings due to less need for discounting.
Stock Price Outlook
Following the report, Nike's shares were trading 4% higher to a new, all-time high. The optimism seems justified as Nike is emerging from the coronavirus in an even stronger position. It's growing sales and earnings. Its digital sales channel accelerated its growth.
Given that sales grew 24% in China, compared to only 1% in North America, we can also see what type of spending explosion is going to happen when the economy returns to normal with the vaccine. The one note of weakness (in-store sales) is going to see extraordinary growth in the coming quarters.
However, the real bull case for Nike resides in its app and DTC sales strategy. Through these efforts, Nike is able to design better products due to feedback from customers and market them more effectively. Additionally, by selling directly to consumers, it will realize higher margins.
Given the combination of this secular growth strategy, higher margins, and coming cyclical boost, Nike is set up to outperform, once again, in 2021.