What Happened

Nike reported strong quarterly financials, considering the immense impact of the COVID-19 pandemic, which started in China, a major market for Nike. As a result of the disruption caused by the coronavirus, earnings came in below expectations, also impacted by a significant one-time charge related to a change in Nike's business model in South America. Overall sales rose, beating expectations, with sales in China falling 5%, in line with expectations, while U.S. sales rose. Direct-to-consumer sales rose 13%, which was higher than expected, and digital sales overall were up 36%. Nike seems to be continuing to pivot effectively to direct-to-consumer sales, and the hit to its sales in China was within expectations, where there had been a strong possibility of a negative surprise. Markets agreed and Nike shares are up nearly 10% at time of writing.

(Below is Investopedia's original earnings preview, published 3/18/20)

What to Look for

Nike Inc. (NKE), the world's largest athletic apparel company, recently has taken steps to increase its direct-to-consumer (DTC) sales, even pulling its products from listings on Amazon.com, Inc. (AMZN). This new strategy, which bypasses regular distribution channels, may mitigate the damage to Nike as the spreading coronavirus forces the global shuttering of stores. Investors will be closely watching Nike's direct-to-consumer sales, a key metric, when it reports earnings for Q3 FY 2020 after the market closes on March 24.

Investors also are likely to focus on a second Nike metric, which is the company's sales in greater China. It's a major market and the first to be significantly affected by coronavirus, also called COVID-19. Analysts see a mixed quarter for Nike, estimating earnings per share will fall even as revenue rises. They estimate Nike's greater China sales will decline for the first time in more than 3 years.

Over the past year, Nike's stock significantly underperformed the S&P 500. Its total return during that period is -19.6%, compared with -10.7% for the benchmark index. Much of that decline has come in the past few months.

One Year Total Return for S&P 500 and Nike
Source: TradingView.

Nike's fiscal year ends on May 31. Nike stock climbed last September following Q1 FY 2020 earnings that topped analyst expectations, rising 28% on a 7% surge in revenue. But revenue growth may be starting to slow in Q3 of FY 2020. Revenue rose by 6.5% in Q3 FY 2018 and by 7.0% in FY 2019, but growth is forecast to slow to a 3.4% gain to $9.9 billion in the Q3 of this year.

While revenue has been growing, earnings per share (EPS) have been essentially flat in Q3 FY 2018 and Q3 2019. Now, analysts expect Q3 FY 2020 earnings to drop significantly, predicting a 9.5% decline to $0.62 per share. This would be particularly jarring for investors after Q2 FY 2020, when Nike reported a 33.8% gain in EPS.

Nike Key Metrics
  Estimate for Q3 2020 (FY) Q3 2019 (FY) Q3 2018 (FY)
Earnings Per Share $0.62 $0.68 $0.68
Revenue (in billions) $9.9 $9.6 $9.0
Direct-to-Consumer (DTC) Revenue (in billions) $3.0 $3.0 $2.6
Greater China Sales (in billions) $1.5 $1.6 $1.3

Source: Visible Alpha

One of the most important metrics that investors will want to focus on is Nike's direct-to-consumer revenue, which analysts expect to climb by 1.9% YOY in Q2, to $3.0 billion. This represents a dramatically slower pace of DTC revenue growth than the company has seen in the past 12 quarters. If Nike produces higher-than-expected DTC revenue in the most recent Q3 FY 2020, it could be a sign that its decision to sever a two-year partnership with Amazon was a savvy one, and that the company's broader strategy to eliminate intermediary retailers has paid off. Q3 also may indicate whether the company's investment in digital retail channels like online selling platforms and apps as part of its Consumer Direct Offense strategy has been successful. Since the new strategy took effect in 2017, Nike has seen strong, double-digit YOY growth in DTC revenue each quarter, reporting a 14.0% increase in Q1 and 15% growth in Q2 of this fiscal year .

A second metric for investors to watch is Nike's sales in the greater China region, which comprised 16% of Nike revenue in its last fiscal year. This metric is useful not only because China is a significant market but also because sales there in recent months could be a helpful indicator of how COVID-19 affected sales there, and how it could affect sales elsewhere in the world as the pandemic has spread. Nike's business in greater China has been booming in recent quarters, with quarterly revenue growing by 24.3% YOY in Q3 FY 2018 and by 18.9% YOY to Q3 FY 2019. Analysts expect that COVID-19 will reverse this upward momentum. According to consensus estimates, Nike's greater China sales revenue may fall 4.2% year over year in Q3 FY 2020 This would be the first quarterly decline in at least three years.