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Does Nike (NKE) Stock Look Like a Buy Ahead of Q2 Earnings?

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Nike NKE will report its second quarter fiscal 2020 performance after the closing bell on Thursday, December 19. The apparel giant saw its shares reach another new 52-week high Tuesday, with NKE stock up 34% in 2019 to outpace the broader apparel market’s 25% run.

Nike stock has climbed 14% since its last earnings report. So, will Nike shares continue to climb after the sportswear firm reports its Q2 results?

Breakout Q1 Sets the Stage

The athleisure giant captivated Wall Street with its first quarter performance where it saw its net revenue grow 7% to $10.7 billion and its bottom-line climb around 28%. Nike’s bottom-line growth was driven by its 25% jump in net income and its gross margin expansion from 44.2% to 45.7%.

China continues to be a key source of growth for the apparel giant, with Greater China revenue up 27% in Q1 on a constant currency basis.

Nike has also ramped up its digital efforts with its NIKE app that serves as a one-stop shop for all Nike products, along with other ecommerce efforts. The NIKE app has launched in 21 countries and went live in China this holiday season.

The firm’s digital storefront also provides higher sales margins, which has helped the company improve profitability. The success that Nike has had with its digital initiatives put it in a position to branch off from directly listing its products on Amazon (AMZN - Free Report) in early November.

Amazon Breakup & Outlook

Third party sellers reportedly account for 60% of Amazon sales, which has made it difficult to regulate the authenticity of the items sold. This type of marketplace is not what Nike is looking for as its products are typically marketed to customers who are looking for an authentic, technically advanced product.

Nike didn’t feel that it benefited from the partnership in the way that it had envisioned back in 2017. Plus, its own booming digital sales helped Nike decide to part ways with Amazon to focus on its own digital push. Digital sales rose 42% in Q1 and digital sales in the company’s fiscal 2019 accounted for 10% of total revenue. The NIKE app works at the new digitally focused Foot Locker FL as well.

Nike isn’t the only apparel giant seeing success in the digital channel, as Adidas ADDYY and Lululemon LULU have both increased their digital sales. As shopping moves increasingly online, growing its customer loyalty through innovative digital initiatives should bode well for Nike.

Our Q1 Zacks consensus estimates forecast a bottom-line hike of 9.6% to $0.57 per share and a top-line gain of 7.5% to $10.1 billion.

Nike Brand sales are projected to grow about 8% to $9.66 billion. Footwear sales are anticipated to rally 8.9% to $6 billion and apparel sales are predicted to climb 8.2% to $3.3 billion.

The Greater China region is projected to continue its impressive growth with a 16.6% hike to $1.8 billion. And the release of the NIKE app in China should help bolster its sales in the region this holiday season.

The top and bottom-line gains are expected to continue but earnings growth is expected to slow down in Q3. The Greater China region is also expected to decelerate a bit to 16.6% growth.

Bottom Line

Nike announced an 11% increase to its quarterly dividend in November. While this brings its dividend yield to only about 1%, Nike has steadily increased its dividend over the past 18 years and currently pays out only about 33% of its earnings on its dividend, which gives it room to grow in the future.

Nike has been on a roll lately and the stock sits at a Zacks Rank #3 (Hold).

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