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Will Strong Digital Show Bolster NIKE's (NKE) Q2 Earnings?

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NIKE Inc’s (NKE - Free Report) digital business, which has gained prominence due to the pandemic-led shift in consumer shopping preference, is likely to have contributed to strong top-line performance in second-quarter fiscal 2021. The company will report fiscal second-quarter earnings on Dec 18.

Digital Business Proves Savior for NIKE

NIKE’s sales have been witnessing a rebound after experiencing stark declines in the initial phase of the coronavirus pandemic. The company was undoubtedly impacted by the closure of its company-owned and partner stores across all regions. However, it quickly shifted focus to digital sales, given its efficient digital ecosystem that comprises its online site as well as commercial and activity apps, which has helped recover most of the lost sales from store closures. In fact, the company is likely to have witnessed revenue growth in second-quarter fiscal 2021 as strong digital sales are expected to have offset the soft retail traffic at stores and a decline in wholesale revenues.

With consumers becoming increasingly digitally focused, NIKE is optimistic about its e-commerce operations and has been investing in the further enhancement of capabilities therein. It has been focusing on boosting scale by widening assortments available online as well as enhancing distribution center capacities. As part of the Consumer Direct Acceleration, the company’s immediate priorities include improving personalization and creating a consistent end-to-end technology platform.

Further, it has been striving to better harness consumer data to understand online shopping preferences and meet demand more efficiently. It has also been working toward accelerating digital throughput and reducing order cycle times by up to 50%. Gains from these initiatives are likely to get reflected in the company’s top-line results for the to-be-reported quarter.

Current Business Trends

NIKE has been experiencing robust digital sales growth across all regions for the past few months. In the fiscal first quarter, digital sales for the NIKE brand witnessed double-digit growth across North America, Greater China and APLA along with triple-digit growth in EMEA. The persistence of the digital shopping momentum is likely to have contributed meaningfully to its sales in the second quarter of fiscal 2021.

Additionally, the company’s consumer engagement and membership metrics have been depicting strong momentum. During the fiscal first quarter, the demand for NIKE commercial app increased two folds, with triple-digit growth in monthly active users.

In the last reported quarter’s earnings call, management highlighted that digital sales continued to prosper even as the stores reopened. This demonstrates that the strength of its brands and investments made in the past several years to improve digital consumer experiences are likely to get reflected in its sales results for the to-be-reported quarter.

However, we note that the company’s physical store traffic recovery has been slow mainly due to the COVID-related safety and social-distancing measures. Moreover, it has continued to be cautious regarding market volatilities and uncertainties emerging out of the ongoing pandemic.

Overall Expectations

The company believes that the digital acceleration reflects a strategic shift toward a new future marketplace, rather than being a temporary solution to the coronavirus-related challenges in physical markets. Moreover, tight operating expense management, effective marketing spending, and lower demand-creation and operating overhead expenses are likely to have aided margins and bottom line in the to-be-reported quarter.

For the near term, the Zacks Rank #3 (Hold) company expects the stronger-than-anticipated demand for its brands to be constrained by the supply decisions taken in the face of the pandemic. Furthermore, in the last reported quarter’s earnings call, management highlighted that inventory is on track to be normalized in the fiscal second quarter. The company’s return to normalized inventory levels by the end of the fiscal second quarter is likely to have aided the gross margin.

NIKE, Inc. Price, Consensus and EPS Surprise

 

NIKE, Inc. Price, Consensus and EPS Surprise

NIKE, Inc. price-consensus-eps-surprise-chart | NIKE, Inc. Quote

The Zacks Consensus Estimate for the company’s fiscal second-quarter earnings stands at 63 cents, suggesting a decline of 10% from the year-ago quarter’s reported figure. For fiscal second-quarter revenues, the consensus mark is pegged at $10.59 billion, suggesting a 2.6% increase from the prior-year quarter’s reported figure. (Read More: NIKE to Report Q2 Earnings: What's in the Offing?)

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