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NIKE's (NKE) North America Business to Drive Earnings in Q2

NIKE Inc. NKE is about to report second-quarter fiscal 2019 results on Dec 20. The company witnessed continued momentum in its North America division, after a comeback in fourth-quarter fiscal 2018. This segment, which is the company’s largest market, should contribute meaningfully to the upcoming results.

Notably, the NIKE stock has surged 16% year to date, outperforming the industry’s 9.4% growth.


North America Division’s Q1 Performance

Revenues for NIKE’s North America business, which returned to healthy and sustainable growth, improved 6% in first-quarter fiscal 2019. This was backed by solid growth across both footwear and apparel, fueled by new innovative platforms, and strong growth at both owned and partnered digital channels. Notably, NIKE Digital grew double digits in North America, contributing primarily to growth. The company’s locations, which leveraged digital connections with customers, drove most of growth in North America.

Outlook for North America

NIKE expects the momentum witnessed in North America to continue throughout fiscal 2019 and beyond. The company continues to target mid-single-digit revenue growth in North America in the next five years.

Additionally, the company is on track to return the Jordan brand to growth in fiscal 2019. After tightened supply in the second half of fiscal 2018 for the Jordan brand, the company is focused on bolstering its iconic styles. Additionally, it is extending dimensions of the brand by expanding sizes and making collaborations, mostly for women. Additionally, apparel and performance basketball represent significant growth opportunities.

Furthermore, NIKE is working to further amplify its wholesale business in North America, which returned to growth in the fiscal first quarter. The company sees immense opportunity here by creating a differentiated experience by leveraging the learnings from the NIKE app at retail and NIKE by Melrose.

For North America, the Zacks Consensus Estimate for revenues in the fiscal second quarter is pegged at $3,688 million, which reflects growth of 5.8% year over year.

Overall Business Trends

Apart from the trend reversal in North America, NIKE owes its robust surprise history to continued growth at international and NIKE Direct businesses, as well as strong progress on Consumer Direct Offense through innovation. Notably, the company has delivered positive earnings for over three years now, with first-quarter fiscal 2019 marking the 25th straight quarter of earnings beat. Moreover, sales topped estimates for the sixth straight quarter. Furthermore, the company continues to gain from robust growth and innovation efforts alongside its strategy of acquiring sponsorships for various sporting events across the globe.

In the fiscal fourth quarter, the company’s overall revenues increased 10%, up 9% on a currency-neutral basis. Apart from the return to growth in North America, this included double-digit growth at international locations. Solid momentum in high performing categories, including Sportswear, and a 36% spike in NIKE Digital were other contributors.

Overall Earnings & Sales Expectations

Driven by solid business momentum and improving graph in North America, NIKE outlined its revenue guidance for fiscal 2019. Though the company maintained revenue growth guidance in the high-single-digit range, it anticipates results to come at the lower end of this range. For second-quarter fiscal 2019, it expects revenue growth of 9%, in line with the fiscal first quarter.

The Zacks Consensus Estimate for revenues is $9,158 million, reflecting an increase of 7.1% from the year-ago quarter. However, the Zacks Consensus Estimate for earnings is pegged at 45 cents, reflecting decline of 2.2% year over year.

However, the global trade uncertainty and geopolitical dynamics led to the strengthening of the U.S. dollar in the last 90 days. This turned foreign exchange into a headwind for the company. Taking into account the FX scenario, the company expects reported revenues to be 2-3 points lower than the anticipated currency-neutral revenue growth.

Further, higher SG&A expenses remain a concern for this Zacks Rank #3 (Hold) company. For fiscal 2019, it expects SG&A expenses to increase high-single digits. Moreover, SG&A expenses for the fiscal second quarter is expected to increase about low-teens, driven by the timing of investments in sports marketing and strategic investments in new digital capabilities.

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