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Nike: Full Steam Ahead

Nike Inc. (NYSE:NKE) reported financial results for the first quarter of fiscal 2020 last week.

Revenue for the quarter increased 7% to $10.7 billion, despite a strong headwind from foreign exchange (constant currency revenues increased by 10%). Growth in the quarter was broad based, with each of the company's international segments (Europe, Middle East and Africa, Greater China and Asia Pacific Latin America) reporting double-digit constant currency growth; collectively, international revenue grew 16%.

Digital revenue (e-commerce) increased 42% in the quarter, an acceleration from the 35% growth Nike reported in fiscal 2019. As noted on the call, sales through the Nike app nearly doubled year over year. In addition, SNKRS app revenues increased roughly 50% year over year, with run rate revenues likely approaching $1 billion (as CEO Mark Parker noted in his shareholder letter, SNKRS revenues and monthly active users more than doubled in 2019). As those numbers suggest, Nike has a lot of momentum in diigital. Chief Financial Officer Andy Campion stated on the call that: "Our targeted strategic investments are accelerating Nike's digital transformation and extending our competitive advantage". I completely agree; continued investment is expanding the company's moat relative to smaller competitors like Under Armour (NYSE:UA).

From a geographic perspective, Nike benefited from another impressive quarter in Greater China, where constant currency revenue grew 27% to $1.7 billion (with digital up more than 70%). The segment has reported double-digit revenue growth in every quarter for the past five years. As shown below, the company's China business is on pace for roughly $7.5 billion in revenues in 2020 - twice as high as they were four years ago.

It's also worth noting that growth in China has a material impact on profitability: the company's operating (earnings before interest and taxes) margins in Greater China were 40% in the first quarter - 1,400 basis points higher than what it reported in North America (and up 340 basis points year over year).

This is showing up in the consolidated results: for Nike as a whole, gross margins expanded 150 basis points in the quarter (to 45.7%), with gross profits up double digits. This reflect mix shift to international markets like China and digital - two trends that I expect to continue. With help from below the line items (a tailwind of roughly $90 million), pre-tax income increased more than 20%. The share count declined 2%, resulting in a 28% increase in earnings per share.

Zooming out, we can see Nike has delivered strong results since the financial crisis. Based on current estimates for fiscal 2020, the trailing 10-year compounded annual growth rate for diluted earnings per share will be around 12%.


Driven by impressive results abroad and in the digit business, Nike continues to knock the cover off the ball. But I think that reality is largely reflected in the stock price: at $92 per share, the stock trades somewhere around 30 times forward earnings. As shown below, the multiple has expanded significantly over the past several years.

Personally, I need assumptions that are too aggressive for my blood to justify buying the stock at these levels. With that said, I would love to own Nike at the right price. If it fell 20% to 30%, that would probably be sufficient.

Disclosure: None.

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This article first appeared on GuruFocus.