Nike (NKE, Financial) reported its second quarter earnings on December 18, and beat analysts’ estimates in terms of both top and bottom line. Also as the apparel market is at its boom phase, the product line of Nike is growing beyond imagination. In fact Nike expects its women’s business to be driving $7 billion in sales by 2017 fiscal year. Investors and analysts were a bit perturbed after the results were out leading to a slump in the stock, but soon it revived on the same day of trading. Let’s dig in deeper to find out the key highlights of the second quarter of Nike.
The numbers say it all
The company reported impressive sales and earnings growth during the quarter, but there was a drop in future orders and an overwhelming margin squeeze was noticed that impacted the athletic apparel maker’s prospects.
The apparel maker reported slower growth in future orders in the second quarter compared to the first quarter. The growth rate came in at 11% for the second quarter which was far behind the 14% growth witnessed in the first quarter on a constant currency basis.
Future orders coming from the emerging markets were posted at only 1% as opposed to the consensus of 7%. However, revenue increased 15% from the year ago to $7.4 billion ahead of analysts’ expectations by $230 million. Meanwhile, diluted earnings per share scaled up by a remarkable 25% to $7.4 a share, growing beyond analysts’ estimates of $0.70 apiece on sales of $7.15 billion.
Nike was able to outperform the revenue expectations for the fourth quarter at a stretch, by manifesting the success of its recent strategies.
Focus on Direct-to Consumer expansion bearing fruit
The company’s focus on its high-margin Direct-to-consumer (DTC) business remains a strong driver of growth for the company. This segment has been growing for the past five years, and Nike emphasizes on building and enhancing direct relationships with customers and less on wholesale products.
Management have indicated that they would continue investing in this mode of business. As the contribution from this segment is expected to expand, the apparel manufacturer’s profits are expected to improve in the coming quarters. In fact, the company expects the DTC business to reach a revenue goal of $5 billion by 2015 and around $8 billion by 2017.
With the DTC business expansion, top-line growth is slated to continue for Nike, with gross margins peaking in the quarters ahead.
Financials of company remain solid
Nike has around $4.6 billion in cash and short term investments, which makes its financial position strong as it continues to benefit from innovation, research and development, or acquisitions that aid in expanding its product portfolio.
The global giant is known for its free cash flow generation, as it generated $2.1 billion as FCF in 2013, as opposed to Under Armour Inc. (UA, Financial) which delivered $32 million.
The company projects generation of FCF to the tune of $12 billion over the next five years. This in turn reinforces opportunities for Nike to expand margins and grow the profits in the long term.
Providing superior returns to shareholders
In the first quarter, the company repurchased around 10.6 million shares, valued around $819 million. The company has set a four-year share buyback plan that has commenced last year, where it intends to repurchase over $8 million worth of shares. So, it remains an attractive investment option for investors.
Final word
Nike is on a growth trajectory, and also strong financials to consistently generate profits in the coming quarters. As the company remains committed towards its shareholders, Nike remains an attractive choice for investors in the long term.
