Nike’s (NKE, Financial) second-quarter results were better than market expectations with the world’s largest footwear maker reporting earnings of 50 cents per share on revenues of $8.18 billion, much better than the Wall Street forecast of $8.09 billion in revenues and earnings of 43 cents per share.
But the enthusiasm from the better-than-expected results was doused by slow growth of future orders, which grew by 2% on a constant currency basis with North American future orders declining by 4%.
Future orders is a key metric for Nike as it is considered a proxy to market demand for Nike products. The higher the number the stronger the demand, and the contraction in North America does signal a slowdown in one of the most important and profitable regions for Nike, raising a few questions about Nike’s future growth prospects in the U.S.
Nike’s revenues grew 6% during the quarter and has now grown 7% in the first six months of the current fiscal, much lower than the double-digit growth the company needs to capture if it wants to achieve its goal of $50 billion in sales by 2020. Every quarter of less than 10% growth is only going to increase the time Nike takes to travel to its $50 billion target, and the slowdown in future orders definitely lowers the odds of Nike achieving those goals.
North America remains a key concern for Nike as the company earns the bulk of its revenue from the region. During the second quarter Nike reported $3.65 billion in sales from North America, accounting for nearly 45% of its overall revenue during the quarter. Footwear grew by 3% while apparel registered 4% growth, significantly lower than the prior period when footwear grew by 12% and apparel grew by 8%. Nike’s growth rate, though still on the positive side, has actually more than halved this year compared to last year.
The second quarter of 2017 was Nike’s 28th consecutive quarter of growth. Despite the obvious slowdown in growth pace in one of its key regions, Nike left its outlook for the year untouched, which means the company expects things to get better, not worse, during the second half of the year.
“In the second half of fiscal year '17, we now have tighter supply against continuing strong demand. And that will have a favorable impact on revenue growth as a result of lower year-over-year cancellations, returns and discounts. As for specific guidance, for the full year, we continue to expect reported revenue growth in the high single-digit range.” – Nike Second Quarter 2017 Earnings Call
Competition from Under Armour (UA, Financial) and adidas (ADS, Financial) has been growing, but Nike has been competing with them for many years and was still able to keep its sales growing within the U.S. as well as outside. But things have definitely tightened a bit this year, and the company has to pick up speed in its home country if it wants to get anywhere near $50 billion by 2020.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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