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The Science of Hitting
The Science of Hitting
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Nike: Mark Parker Exits on a High Note

A look at the company's second quarter results

December 24, 2019 | About:

Nike (NKE) recently reported financial results for the second quarter of fiscal 2020.

Revenues in the quarter increased 10% to $10.3 billion, despite a strong headwind from foreign exchange (constant currency revenues increased 13%). Growth was broad based, with each of the company’s international segment (EMEA, Greater China and APLA) reporting double-digit growth; collectively, international revenues increased 18% in the quarter. In addition, the key product categories performed well, with footwear and apparel up 13% and up 9%, respectively.

Digital revenues (e-commerce) increased 38% in the quarter, led by 32% growth in North America and 44% (constant currency) growth in Greater China. As noted on the call, sales through the Nike app and the SNKRS app, which collectively account for more than one-third of the company’s digital revenues, continued to grow at an impressive pace, with active users on the apps nearly doubling over the past year. The results continue to indicate that Nike has a lot of momentum in Digital. As CFO Andy Campion stated on the call, “we are extending Nike’s digital advantage and positioning for even greater competitive separation over the long term.” Considering what they’ve delivered in recent quarters, particularly relative to peers like Under Armour (UA), I believe Campion is right.

From a geographic perspective, Nike benefited from another impressive quarter in Greater China, where constant currency revenues increased by 25% in the first half of fiscal 2020 (continuing a streak of more than twenty consecutive quarters of double digit revenue growth in the region). As shown below, the company’s China business is on pace for $7.5 billion in revenues for the year – good for a trailing ten-year revenue CAGR in the mid-teens.

It’s also worth noting that growth in China has a material impact on profitability: the company’s operating (EBIT) margins in Greater China were 39% in the first six months of the year – 1,500 basis points higher than what they reported in North America. This mix shift, among other factors, is a tailwind to the consolidated results. For Nike as a whole, year-to-date gross margins have expanded 90 basis points to 44.9%, with gross profits up 11%. With help from operating leverage (partially attributable to the timing of certain expenses that shifted to the back half of the year), below-the-line items (a tailwind of roughly $80 million relative to the year ago period) and a lower effective tax rate, net income increased 28% year to date to $2.5 billion. After accounting for the lower share count, diluted earnings per share (EPS) has increased 31%.

Zooming out, we can see Nike has delivered strong results since the financial crisis. Between revenue growth, margin expansion (helped by the lower corporate tax rate) and repurchases, diluted EPS has roughly tripled over the past decade (12% CAGR).

Conclusion

Nike continues to knock the cover off the ball, and Mr. Market clearly expects this to continue. At the time of writing, the stock trades above $100 per share, or 33 times forward earnings. Even with what I believe to be reasonable assumptions, I expect Nike to earn less than $5 per share in fiscal 2024. Put differently, even if you look out five years, the stock trades north of 20 times earnings.

I would love to invest in Nike at the right price, but I personally think that is quite a bit below where it currently trades. Shares are up by nearly 50% over the past year. I’ll let outgoing CEO Mark Parker, who will be stepping down from his position in a few weeks, take the last word:

“I’m leaving this role with so much optimism for the future of this company. Sport continues to inspire and move the world forward in incredible ways. Our brand is connecting deeply with consumers everywhere. Our innovation is helping athletes prove that there are no limits. We’re challenging the conventions of retail at every turn. We’re growing our biggest businesses and focused on our greatest opportunities and we’re bringing tremendous talent into Nike to add to our already-deep bench of leaders. It’s clear that sport is thriving. Nike has the right people. And the right plan. What’s great is I won’t be a spectator to all of our success, I’ll be part of the team creating it. So, with that, for the last time I’ll say, thank you.”

Disclosure: None

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About the author:

The Science of Hitting
I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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