- Nike delivered another all-around beat on December 18, sending shares even higher for the year.
- Despite temporary store closures, revenues climbed nearly 9% on the back of e-commerce, while margin expansion helped to produce a solid EPS beat of 16 cents.
- Historically, NKE tends to ride momentum following a year of strong performance, which makes me less worried about high valuations.
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In a year marked by the dominance of tech and defensive stocks over the rest of the market, one name may have flown under some investors’ radar. Nike (NKE) has risen an astounding 42% so far this year, after climbing about 50% in 2019. On December 18, the Oregon-based company provided more reasons to justify the stock’s outstanding performance.
Nike delivered an all-around beat, the tenth in the past twelve quarters – i.e. since this time in calendar 2017. Revenues of $11.24 billion increased nearly 9% YOY, well above consensus. GAAP EPS of $0.78 climbed about 11%, reflecting moderate operating margin gains. On the back of the strong financial results, shares finished the post-earnings trading day up 5%.
Strong as usual
In the fiscal second quarter, online sales stole the show once again. Nike Direct Sales saw growth of 30%, lifted by all geographic regions. The top-line results could have been better, if not for temporary closures of physical stores due to the rise of COVID-19 cases globally – a theme that will likely persist for one more quarter at least, if not two.
The period was also marked by inventory cleanup, a byproduct of the pandemic disruptions. As a result of it, along with some restructuring costs, gross margin dipped 90 bps, despite solid margins on full-priced products. I continue to think that the margin headwinds are more temporary than indicative of longer-term, unfavorable trends.
Also due to the impact of COVID-19, fewer sports events led to Nike spending less on marketing. The end result was a two percentage point increase in op margin YOY. If not for unfavorable below-the-line items leading to a thirteen-cent haircut to EPS, including a substantially higher effective tax rate, Nike’s bottom line beat could have been even more impressive.
