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Nike (NKE) Shares Climb to All-Time Highs: Will Growth Be Sustainable?

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Nike (NKE - Free Report) reported fiscal 2020 first quarter earnings on Tuesday after the closing bell. The sneaker giant reported solid top and bottom-line beats despite tough macroeconomic headwinds, and shares soared to new all-time highs after the report was released. Nike shares are now up 23.1% in 2019, surpassing the broader apparel market’s 15.8% YTD gain. Will the footwear giant’s first quarter be an indicator of how they will perform in fiscal 2020?

Robust Sales Trend Continues

Nike continued its robust sales trend in Q1 by investing in selling more sneakers and apparel in its stores. Designing high-tech sneakers, fashionable athleisure apparel, and opening new stores to avoid selling their products in discount outlets have also helped Nike stimulate growth. Nike CEO, Mark Parker, cited “the global shift towards more active lifestyles continues to accelerate, and demand for athletic product is high,” as additional catalysts for the sales surge.

Nike’s subscription-based service for kids’ shoes helped the firm have its best back-to-school season ever in kids’ sales. Consumers have the option of signing up for a plan that would deliver a new pair of shoes to them either quarterly, bi-monthly, or monthly. Clients on the 90-day delivery plan pay $20 a month, bi-monthly users pay $30 a month, and monthly subscribers pay $50 a month.

The move is Nike’s latest initiative to cement itself in the US kid’s footwear market, which is valued at around $10 billion. The footwear giant is also reportedly looking into offering a subscription for running shoes. The potential move would make sense as consumers who are avid runners go through shoes more often than the average person.

In Q1, Nike’s net sales jumped 7% to $10.7 billion and earnings surged 28% to $0.86 per share, beating our top and bottom-line estimates by 2% and 21.13%, respectively. The NIKE brand reeled in $10.1 billion while the Converse brand attributed $555 million for respective Y/Y increases of 7% and 5%. Despite trade war headwinds, the NIKE brand kept strong footing in China in Q1 and also generated Y/Y sales growth in the rest of its geographical divisions. The Greater China and Asia Pacific & Latin America divisions led the pack with the largest respective gains of 27% and 13%.

Will Nike Keep This Up?

Our Q2 consensus estimates project Nike’s top-line to jump 8.21% to $10.14 billion while earnings are expected to grow 11.54% to $0.58 per share. The NIKE brand is forecasted to pop 10.4% and the Converse brand is anticipated to surge 26.6%. NIKE’s geographical growth is expected to continue across the board with North American and EMEA sales leading the way with respective climbs of 15.01% and 14.3%.

For fiscal 2020, Nike continues to expect revenue growth in the high single digit range and anticipates gross margin to expand 50-75 basis points. The firm’s CFO, Andy Campion, stated that even “amid the increasingly volatile macroeconomic and geopolitical environment, we expect our unrelenting focus on better serving the consumer to continue fueling strong, broad-based growth across our global portfolio."

Nike has actively been expanding its portfolio as it has had a recent slew of acquisitions of some tech startups like predictive analytics company Celect. This past August’s acquisition of Celect can put Nike in a better position to better predict what style of sneakers and apparel consumers will most likely want as well as when and where they’d want it from. This acquisition is a move that the company’s competitors are not doing, which shows that Nike is trying to think outside of the box and is truly focused on expanding its iconic brand.

The Celect acquisition comes after NIKE absorbed the consumer data analytics firm Zodiac and the computer vision company Invertex last year. Both firms helped Nike successfully launch a digital initiative to better incorporate themselves in the digital marketplace. Nike seems to be making many moves that put the company in a separate category from the rest of its industry peers. Shares have seen solid growth in 2019, and the firm’s fundamentals continue to impress Wall Street. NKE sits at a Zacks Rank #3 (Hold) with a Style Score of A in Growth.

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