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The Ratings Game: Nike highlights soaring growth in digital and China after results beat expectations

Nike had a record Black Friday week, while Singles Day and sales in China drove 24% growth in the region. Read More...

Nike Inc.’s NKE, -1.04% better-than-expected fiscal second quarter was due, in large part, to the company’s efforts in digital and growth in China, according to comments from Chief Executive John Donahoe.

Nike brand digital sales soared 84% over the quarter, with triple-digit growth in North America. Black Friday week stood out.

“[T]his holiday season also was highlighted by the record-setting digital sales we saw during Black Friday week, which has shown the power of our digital transformation all over the globe,” Donahoe said on the call, according to FactSet.

“Digital is now woven into everything we do as a company.”

That includes product launches.

Image via Nike

“The LeBron 18 was introduced in September through an integrated livestream with Tencent in Greater China, driving deeper connection to local hoops culture, and we launched the Kyrie 7 by announcing four color ways available only as mystery purchases through the SNKRS app,” Donahoe said.

Livestream shopping events have gained popularity in the U.S. during the coronavirus pandemic. China is further along in adopting this shopping method, and Nike is jumping in, launching a livestream studio in China ahead of Alibaba Group Holding Ltd.’s BABA, -1.76% Singles Day shopping event.

See: These technologies allow you to shop with your friends – without leaving the house

Singles Day was also a blockbuster for Nike, driving 4 million new members to the loyalty program and more than $500 million in digital demand.

Second-quarter sales growth in Greater China was 24%.

“Our success in Greater China was also driven by a triumphant Singles Day, in which Nike yet again was the number one sport brand, with the highest store demand and highest traffic on Tmall,” Donohoe said.

“Our leadership momentum and trajectory in Greater China is helping to shape decisions we are making around the rest of the world,” added Matthew Friend, chief financial officer, on the call.

Nike also scored with its (M) maternity line, which sold in two days, and plus sizes, with an increase to that offering for women on the way and a 25% increase in the assortment for kids coming in the summer.

Also: U.S. will remain biggest retail market as government stimulus, e-commerce push the nation ahead of China

“Nike will continue to enable sport to be more accessible in terms of sizing, gender, kids, etc. into 2021 with the Jordan brand scaling to new heights,” wrote Cowen analysts led by John Kernan. “Digital is slightly margin accretive today and will turn highly accretive as scale grows through analytics, supply chain and speed.”

Cowen rates Nike stock outperform with a $170 price target, up from $165.

“These results and proof points of the digital transformation embolden our thesis of business evolution to a higher margin, higher return model and give us confidence in our view of gross margin driven earnings upside capacity,” wrote Stifel analysts led by Jim Duffy.

“We see Nike positioned for multiple years of margin improvement and improving return characteristics, and view Nike as a solid core holding for large cap growth investors.”

Stifel rates Nike stock buy with a $168 price target, up from $164.

KeyBanc Capital Markets noted the decline in wholesale sales in North America, even as it grew in other parts of the world.

Nike’s CFO Friend said on the call that “undifferentiated accounts” in North America were down 30% over the past three years, leading to a decline in wholesale revenue in the most recent quarter. Instead, the company is focused on its strategic partners and on Nike Direct sales, which was up double digits for the Nike brand.

“Moving forward, we expect growth in Nike Direct (continued strength in digital plus more than 30 store openings through 2H21 and more in ’22) to outpace that of wholesale (we expect continued pullbacks in ‘undifferentiated’ retail), driving high profit revenue growth,” KeyBanc’s Matthew DeGulis wrote.

Watch: How to pick winners in the retail sector amid the pandemic

“And unlike North America, wholesale is growing in EMEA at +6% for the quarter, as core accounts like JD and Zalando continue to perform well.”

KeyBanc rates Nike stock overweight with a $174 price target.

Nike’s price target was raised at at least four other research groups, including: Baird (up to $150 from $135 with neutral stock rating); BMO Equity Research (up to $160 from $134 with outperform stock rating); Raymond James (up to $155 from $140 with an outperform stock rating); and JPMorgan (up to $170 from $146 with an overweight stock rating).

Nike shares were up nearly 5% on Monday, and have rallied 42.5% over the last year. The Dow Jones Industrial Average DJIA, -0.67% is up 5.5% for the past 12 months.

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