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Nike's (NKE) Future: Flipkart, Alibaba, "Smart Retail" & More

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Nike (NKE - Free Report) saw its shares dip Wednesday after it reported its Q1 financial results Tuesday. The pullback was somewhat predictable since Nike stock surged to a new high in the run up to its quarterly earnings release. But Nike’s future looks as strong as ever through its commitment to digital initiatives, partnerships with Alibaba (BABA - Free Report) , Tencent (TCEHY - Free Report) , Walmart’s (WMT - Free Report) Flipkart, and much more.

Q1 Overview

Nike reported fiscal first-quarter net income of $1.09 billion and per-share profits of $0.67, which topped our Zacks Consensus Estimate of $0.62 per share and represented 18% growth from the year-ago period. The sportswear power’s revenues also beat our estimate and jumped 10% to $9.95 billion.

More specifically, Nike’s North American revenues popped 6% to $4.15 billion, on the back of strong apparel and footwear sales. This marked the second quarter of growth in this vital region, which accounts for roughly 40% of total revenues, after three straight periods of sales declines. Meanwhile, revenues in Greater China climbed 20% to $1.38 billion—marking the 17th consecutive double-digit growth in this key region. However, Q1 marked a slowdown from last quarter’s 35% expansion.

Nike’s digital push played the largest roll in the company’s overall quarterly expansion, with digital sales up 36% for the quarter. The firm’s gross margin climbed by 50 basis points to 44.2%.

Despite its increased margin, Nike’s “Demand Creation” or simply the costs related to advertising and promotion, rose 13% due to increased spending around sporting events—primarily the World Cup. Operating overhead also climbed by 5%. But this jump was driven by investments in supply chain and digital and enterprise technology platforms.

Looking ahead, Nike maintained its fiscal 2019 forecast, with revenues expected to grow in the high-single-digits.

 

What’s Next?

Now that we have covered the nuts and bolts of Nike’s Q1 results, let’s dive into what CEO Mark Parker and CFO Andy Campion had to say about the sportswear giant’s future. Right off the bat, Nike focused on its Triple Double plan that aims to create 2X Innovation, 2X Direct, and 2X Speed.

Nike Digital was the firm’s fastest-growing channel in every one of the firm’s regions, with mobile expansion leading the way. “We continue to see unprecedented demand for our highest-heat product through our SNKRS app, which has become the world’s #1 footwear shopping app,” Parker said on Nike’s earnings call. “And we’ll continue to expand the reach of SNKRS, launching in Mexico, Brazil and Southeast Asia next quarter.”

Digital Expansion  

Nike announced that it has moved beyond the testing phase of its partnership with FlipKart in India. Growth through the Indian e-commerce giant—Walmart recently became Flipkart’s largest shareholder as it fights against Amazon (AMZN - Free Report) in one of the world’s largest countries—could prove vital going forward as Nike searches for more growth.  

The firm also touched on its new partnership with Walmart’s JET.com to help it expand its e-commerce presence beyond its own platforms. Maybe more importantly, Nike now allows users to combine their NIKE Plus accounts to Alibaba’s Tmall accounts. The company noted that it has seen an “impressive increase in new members in China as a result” of its new Tmall partnership. Plus, Nike just launched a new partnership with Tencent’s WeChat, which boasts one billion monthly active users.

Smart Retail

Moving on, Nike hasn’t abandoned brick-and-mortar retail altogether. Instead, Nike has simply narrowed its focus to key retail partners and made its own more traditional retail push. “Our obsession with the store experience is also paying off with top strategic partners,” Parker said.

“While retail consolidation has not finished its course in North America, our growing NIKE Consumer Experiences with Footlocker (FL - Free Report) , Nordstrom (JWN - Free Report) , and other key partners are already driving higher growth rates as compared to non-differentiated doors.”

Nike is also experimenting with what it calls “Smart Retail” that helps intersect digital and physical environments to create an “ever-changing” experience. This includes its new Melrose store in LA. Nike updates its product assortments based on what’s trending with the local customers, while offering the option to reserve an item via an app for curbside pickup. The conversion of in-store shoppers into Nike plus digital members is 6X higher than at the rest of its stores.

Looking ahead, the company is set to roll out new flagship stores in New York and Shanghai next quarter, which Nike referred to as its “two most important key cities.”

Bottom Line

Nike hopes to continue to become more personal, at scale. But this will only work if Nike is able to remain important and meaningful to consumers, which it seems poised to do.

Nike is about to enter the second year of an eight-year sponsorship deal with the NBA. The firm’s dominance in the NBA—one of the most popular sports in China—will likely be even more important going forward than its relationship with the NFL. Nike also continues to expand in the world’s most popular sport, soccer. Plus, its success in the athleisure market and as a fashion giant has helped it better compete against Adidas (ADDYY - Free Report) , Lululemon (LULU - Free Report) , Gap (GPS - Free Report) , among others—while Under Armour (UAA - Free Report) continues to fade in fashion.

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