Nike (NKE) demonstrated the strength of its business, and the success of its direct to consumer initiatives in its fiscal Q1'2020 earnings results. Globally, Nike grew sales in every category with the exception of Nike global brand divisions (essentially a licensing business). The stock is poised to open at all time highs this morning, and it's tough to find any reason why it shouldn't.
Total revenues increased 7%, 10% on a constant currency basis. North America remains the primary money machine for Nike, with 4% growth leading to $4.29 billion in total sales. European/Middle East/African sales increased 6% to $2.77 billion. The fastest growing area of the business is Greater China. This segment saw sales revenues increase 22% in the quarter to $1.68 billion. In all, it's tough to say anything negative here. Footwear grew a solid 8% to $6.52 billion in sales, while apparel grew 6% to $3.12 billion. Even equipment is up 8%. As I stated earlier, "Global Brand Divisions" revenue decreased 63% to $6 million.
While sales did increase globally, it's worth noting that earnings growth is stemming mainly from overseas. North America earnings grew 2% to $1.1 billion, while EMEA earnings increased 22% to $609 million, and Greater China earnings increased 33% year over year to $669 million.
Gross profits are up a strong 11%, with margins gaining 150 basis points to 45.7% of revenues. Nike credited the gains to higher selling prices, and the improved margins within the NIKE Direct portion of the business. This direct to consumer initiative seems to be having great results.
Total net income grew 25% year over year. With that kind of growth rate, it's not hard to see why the stock hit all time highs in after hours trading. On a per share basis, that income broke down to $0.86 per diluted share, a 28% increase year over year.
The balanced nature of Nike's gains across all its major markets implies great strength for the king of sports apparel. In a time where investors are still waiting for Under Armour (UAA) to regain its momentum, Nike is going full steam.
Seemingly ready to press past its ceiling, Nike stock is as high as it has ever been. The strong quarter would appear to indicate that Nike's new focus on "direct to consumer" is having a really positive impact on business. Between digital sales, and Nike stores, the sports company is cutting out the middle man and getting its products right to the consumer. This can certainly result in higher margins, assuming the company continues to do a good job at controlling its own expenses.
As Nike continues to do well, there are potential hiccups to be aware of. The trade war with China has seemingly spared the sports company thus far. However, with North American sales growing slowly, newer tariffs on footwear coming in from China could pose a threat to some of Nike's production. While certainly not the end of the world, it could hinder results a bit in the coming quarters.
The other thing to be mindful of is valuation. Nike trades at a high valuation relative to earnings. While that's not uncommon for this industry, it's still something to be cautious of when questioning whether to chase this bullish trend. Personally, I think Nike seems poised to continue its run through at least next spring. Demand certainly seems to be there, and this quarter's string of strong sales reports from a few big retailers implies that consumer spending remains strong. This direct to consumer emphasis plays right into that, and should allow Nike to realize more value from its sales.
I don't chase all time highs, but if Nike's shares correct in the coming weeks, I'll be taking a hard look at the stock.