Key Takeaways

  • EPS was $0.78 vs. the $0.62 analysts expected.
  • Revenue was higher than expected.
  • Direct to consumer sales exceeded analysts' expectations.
  • Digital sales are growing while physical traffic in retail stores continues to decline amid COVID-19 pandemic.

What Happened

Nike's quarterly EPS, revenue, direct to consumer sales all beat analyst forecasts. The fiscal Q2 2021 performance was driven by digital sales growth, which was offset by lower revenue in the company's wholesale business and at Nike-owned stores. Rising COVID-19 cases in certain regions led to temporary store closures, but over 90% of Nike's stores are currently open. Nike said it was still experiencing year-over-year declines in physical retail traffic.

(Below is Investopedia's original earnings preview, published December 14, 2020.)

What to Look For

Nike Inc. (NKE), the world's leading athletic apparel company, is showing strong signs of recovery after the initial shock from the COVID-19 pandemic. Temporary store closures and lower foot traffic decimated sales in the fiscal fourth quarter of the company's 2020 fiscal year (FY), ending in May. But store re-openings and digital growth helped sales and earnings to rebound sharply in Nike's latest reported quarter, Q1 FY 2021, ending in September.

Investors will be watching to see if Nike has been able to maintain its comeback momentum amid a resurgence of global coronavirus cases when the company reports earnings on December 18, 2020 for Q2 FY 2021. Analysts expect earnings per share (EPS) to decline amid a small increase in revenue compared to the year-ago quarter.

Investors also will focus on Nike's direct to consumer (DTC) sales, a key metric encompassing revenue from Nike-owned retail stores and digital platforms (known as NIKE Direct). Analysts expect healthy growth in Nike's DTC sales, though likely slower than the same quarter a year ago.

The company's shares were performing on par with the broader market during the first seven months of the past year. But since around mid-August, the stock has begun to outperform and has risen to new highs. Nike's shares have provided investors with a total return of 42.7% over the past 12 months, well above the S&P 500's total return of 16.6%.

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

Nike's stock jumped after posting Q1 FY 2021 earnings that beat analyst expectations by a wide margin. The company posted relatively strong results considering the global economic shock from the pandemic. EPS rose 11.3% despite a 0.6% decline in revenue. Nike said that a majority of its stores had reopened but still experienced lower physical retail traffic during the quarter. Strong growth across its digital platforms helped to support sales.

It was a definite improvement from Nike's fiscal fourth quarter, during which the adverse impacts of the pandemic reached a peak. Sales plunged 38.0% compared to the same quarter a year ago, contributing to a loss per share of $0.51, the company's first quarterly loss in at least three years. Nike said that 90 percent of its stores were closed for approximately eight weeks across North America, Europe, the Middle East, Africa, Asia Pacific, and Latin America.

Analysts expect mixed results in Q2 FY 2021, indicating that Nike may face a jagged path to recovery. Analysts forecast a modest 2.2% rise in revenue, which is a return to growth after two consecutive quarters of declines. Despite that promising trend, EPS is expected to fall 11.7%.

Nike Key Metrics
  Q2 FY 2021 (estimate) Q2 FY 2020 Q2 FY 2019
Earnings Per Share ($) 0.62 0.70 0.52
Revenue ($B) 10.5 10.3 9.4
Direct to Consumer Sales ($B) 3.6 3.3 2.8

Source: Visible Alpha

As mentioned, investors will focus on Nike's DTC sales as a sign of underlying strength or weakness. The company's DTC business is comprised of its own stores and digital platforms as opposed to those of third-party retailers. In mid-2017, Nike launched its "Consumer Direct Offense" initiative as part of a digital transformation. The initial aim was to leverage the power of digital technology to serve customers much more directly, in the process reducing dependence on third-party retailers. As part of this evolution, Nike in November 2019 stopped selling its footwear and apparel directly on Inc.'s (AMZN) retail platform.

The pandemic has reinforced the urgency with which Nike is implementing its new strategy. In July 2020, Nike announced a series of senior leadership changes as part of its Consumer Direct Acceleration (first announced in June 2020) to speed up the company's transformation across Nike's operations and those of its strategic partners.

Nike's DTC business has grown steadily over the past several years. Excluding Q4 FY 2020, when the pandemic sent DTC sales plunging 16.9%, sales growth has averaged about 13.9% over the past three years. DTC sales rose 12.4% in Q1 FY 2021 compared to the year-ago quarter. Analysts expect growth of 10.8% for Q2 FY 2021. That would be the slowest pace of growth for DTC sales in at least 13 quarters, not including the decline in Q4 FY 2020 just mentioned. Despite those weak Q2 estimates, analysts see a dramatic rebound by the end of the fiscal year. They currently forecast that Nike's DTC sales will rise 20.4% for all of fiscal 2021, which would be the fastest growth rate in six years.