Nike (NYSE: NKE) posted fiscal third-quarter earnings results last week, and most investor attention went straight to the company's decelerating sales growth outlook. The sports apparel and footwear titan saw its expansion pace fall in the key U.S. market after accelerating for three consecutive quarters. Investors reacted by sending shares lower following the report.
There's nothing in the earnings announcement that should worry long-term investors, though, as the business made impressive improvements in areas like market share, profitability, and branding.
Image source: Getty Images.
Nike refers to its innovation efforts of developing, manufacturing, and releasing industry-leading footwear and apparel, as creating "brand heat." There's ample evidence that the retailer remains on top with this strategy.
Standout franchises this quarter included Nike Air platforms like Air Max and VaporMax. Releases here helped the footwear segment grow at a double-digit pace across its sales geographies.
Profitability gains edged past management's forecast, with gross profit margin improving to 45.1% of sales from 43.8% a year ago. Over the past nine months, the metric is up by roughly a full percentage point as higher selling prices are only partially offset by increased costs on inputs like cotton.
$1 billion of digital sales
Digital sales gains slowed slightly but remained robust at 36% compared to 41% last quarter. That boost was enough to achieve Nike's first billion-dollar e-commerce sales quarter, but there should be many more of those on they way. CEO Mark Parker and his team believe that selling channel will eventually account for significantly more than 30% of the business.
A deeper moat
Nike invested $865 million on branding and marketing for its products. It also shelled out more cash on long-term growth initiatives and an improved supply chain.
That level of support would be hard enough for rivals like Under Armour to even approach, and Nike plans to keep raising that bar. With pre-tax income rising 14% in the past nine months, management has plenty of firepower it can direct toward that moat-strengthening goal of pouring resources into competitive assets like branding and the online sales channel.
Inventory inched higher by 1% to significantly trail sales growth. That gap puts Nike in a great position to continue flooding the market with just the most in-demand, high-margin products in the fiscal year's closing months.
Thus, it was no surprise that management is still bullish about their operating outlook over both the short and long term. "We expect our strong pipeline of innovative products, and an acceleration in the creation of new digitally led consumer experiences to continue driving healthy growth in [the U.S.] going forward," CFO Andy Campion told investors in a conference call with analysts.
Stepping further back, management predicts high-single-digit sales growth in the fiscal fourth quarter, which will come on top of the prior year's 8% spike. Gross profit margin is again expected to inch higher thanks mainly to strong global demand and lean inventory. Pressures on earnings include rising input costs, unfavorable foreign currency moves, and elevated spending plans. There's also the ever-present uncertainty around economic growth in key areas like the U.S. and China.
All that said, Nike sees no reason to believe it won't meet its goal of high-single-digit sales growth and rising profitability in fiscal 2020.
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