When the footwear company Nike (NKE, Financial) declared its first quarter results of 2015 on September 25, it made the stock rebound more than 5% in after-hours trading. In fact, the results were phenomenally in the green and even beat the Wall Street analysts’ predictions in terms of top and bottom line. The brand is recognized worldwide and has a wonderful brand image. The results have shown that the company has got huge prospects across the six continents. In the face of intense competition from Adidas (ADDYY, Financial), Nike has been able to protect and even grow its market share in different global regions. Let’s dive in to find out how Nike is growing on a global scale compared to its closest rival and how the stock is reacting to its growth pace. But before all this, a quick recap of the first quarter earnings is necessary. So, here it is.
First quarter numbers at a glance
The company’s report card was outstanding with respect to the first-quarter earnings of 2015. The company’s revenue improved by 15% with growth seen in each of the company’s key business categories. First quarter revenue stood at $7.98 billion, beating Street consensus of $7.8 billion for the quarter. The company’s earnings per share grew 27%, much faster when compared to the revenue growth. The earnings per share were at $1.09 per share, against analyst expectations of $0.88 per share.
This was attributed to the gross margin expansion, lower tax rate and a decrease in the share count – these factors literally drove the earnings on the higher side. Of Nike’s nearly $8 billion in sales, $7.4 billion is attributable to the Nike brand while Converse brought in $575 million, up 16% from the prior-year period. Nike said that during the quarter its demand creation was $897 million, up 23% compared to last year. This increase was driven by marketing investments in the World Cup where it sponsored superstars like Portugal’s Ronaldo and Brazil’s Neymar.
The decrease in company tax is attributed to the increased earnings from outside U.S. operations which are generally subject to a lower tax rate. Also, the $819 million worth of share buyback stimulated the earnings power during the quarter.
Comparison with Adidas
The 2014 FIFA World Cup gave a huge advertising platform to Nike. Though its rival Adidas was the official sponsor of this year’s World Cup, Nike’s commercials generated more online sales as per global video marketing firm Unruly. Last week, Nike’s management claimed that in this World Cup, more players wore Nike’s soccer cleats than any other label.
Data gathered by SportsOneSource shows that in the key U.S. market, Adidas’ share in basketball, running, athletics and casual categories have declined whereas Nike’s share has increased this year.
Notably, even in Western Europe which remains Adidas’ home turf, Nike has outpaced the rival with its sales jumping 25% while the latter’s sales was weak with only 13% growth in revenues. Nike’s revenue growth in Europe was broad based with almost every category ranging from footwear, apparel and sportswear reporting double digit growth.
Share price has surged
Nike Inc.’s shares surged over 12% last week to a 52-week high share price of $89.99 after the athletic apparel and accessories maker reported better than expected first quarter earnings for the 2015 fiscal year.
In the wake of a strong earnings report, analysts have raised the price target for Nike. Morgan Stanley has raised the price target from $88 to $105 a share on the belief that Nike will sustain its three EPS CAGR of 16%. According to Morgan Stanley, EPS will increase due to “"long term investments made to improve product innovation, distribution, supply chain efficiency and FX management".
Growth in China
China and the emerging markets account for almost 25% of the company’s total revenues and are experiencing rapid growth. In the first quarter ended 2015, the company’s revenue has increased 20%, led by 30% growth in comparable same-store sales of the company’s direct to consumer sale segment.
The Chinese economy has been a great support to revenue generation for Nike. Since the disposable income of the Chinese is increasing by leaps and bounds, spending on premium and luxury products is also on the rise. It is the belief of the management that if it continues to launch innovative products for the Chinese customers, it may continue to record double-digit growth in the country and other emerging markets as well.
Last word
As Nike forges ahead of Adidas in most of the operating segments, it indicates that customers now prefer Nike’s products over other labels. The Olympics is set to take place in Brazil in 2016, and Nike is looking ahead to achieve another year of excellent performance. Let’s stay tuned and check out if Nike’s top and bottom lines will sustain this momentum in the near future.
