What Happened

On December 19, 2019 Nike reported FY2020 Q2 earnings. It beat on both earnings and revenue. Despite this, its stock dropped slightly on the news, falling a little less than 2%. The main reason cited was Nike's gross margin which, despite increased direct-to-consumer sales, didn't rise as much as investors wanted due to increased costs from tariffs. Be on the look out for how Nike's direct-to-consumer sales impact their margins if the trade situation improves.

(Below is Investopedia's original earnings preview, published 12/12/19)

What to Look For

Nike Inc. (NKE), the world's largest athletic-apparel company, announced last month that it would stop selling its merchandise on Amazon.com Inc.'s (AMZN) website in a push to sell more directly to consumers. For that reason, a key focus for investors will be the performance of Nike Direct, the company’s business segment that sells directly to consumers (DTC), when the company reports earnings on December 19, 2019 for Q2 of fiscal year 2020 (FY). Analysts are forecasting rising profits, revenue and also gains in direct sales.  Over the past year, Nike's stock has dramatically outperformed the S&P 500 index.

NKE stock performance vs. S&P 500
Source: TradingView.

The stock surged in late September after the company reported Q1 earnings for FY 2020 that beat analyst expectations. Nike reported earnings per share (EPS) of $0.86 versus a forecasted $0.71, surprising analyst predictions by 21.1%. That large, positive surprise was welcomed after the previous quarter's negative earnings surprise.

Earnings in Q1 were up 28.1% from the same three-month period a year ago, which is the highest quarterly year-over-year (YOY) growth for the company in at least two years. Revenue growth for the quarter came in at 7.2% YOY, lower than that experienced in Q1 of FY 2019.

Analysts are expecting 10.5% YOY growth in EPS for Q2, which is much more tempered than last quarter and slightly lower than growth in the same period a year ago. Revenue growth is expected to be more in line with last quarter at 7.5% YOY, but also represents a slowdown from the same three-month period a year ago.

Nike Key Metrics
  Estimate for Q2 2020 (FY) Q2 2019 (FY) Q2 2018 (FY)
Earnings Per Share $0.58 $0.52 $0.46
Revenue (in billions) $10.1 $9.4 $8.6
Direct to Consumer (DTC) Revenue (in billions) $3.1 $2.8 $2.5
Source: Visible Alpha

As indicated, the key metric investors will want to watch for is Nike's DTC revenue, which is expected to rise by 8.4% YOY in Q2. Those would be in line with a general slowing trend in both DTC revenue growth and corporate revenue growth. If Nike is able to outperform in this area, where it has invested more heavily in recent years, the company's stock could receive a nice boost.

DTC revenue growth of 13.9% YOY for Q1 beat overall revenue growth by 6.7 percentage points, reflecting Nike's increased efforts in this segment of its business. A further breakdown reveals e-commerce sales within the DTC channel were up 42.9% YOY for last quarter while sales in DTC stores were up just 3.2% YOY.

Nike's decision to sever its two-year partnership with Amazon last month is the latest in an initiative to cut out intermediary retailers and sell more directly to consumers. More than two years ago, the company launched its "Consumer Direct Offense" strategy aimed at better serving the consumer in more personal ways, and on greater scale. The goal is to accelerate innovation and product creation, concentrate on key store locations, and develop more one-to-one connections with consumers.

Nike also has invested heavily in its digital retail channels, such as apps and online selling platforms. These channels allow for more personalized selling and gets products to consumers faster. Last year, the company opened a six-story flagship store in Manhattan called the "House of Innovation 000" that creates a futuristic shopping experience by combining traditional shopping with an interactive mobile app.