Nike posts another strong quarter thanks to digital strategy

Net income up 25% in the quarter to $1.4 billion

By Clare Duffy, CNN Business
Drew Angerer/Getty Images

(CNN) - Nike's focus on selling directly to consumers is paying off in a big way.

The footwear and apparel company on Tuesday posted earnings of $0.86 per share for the three months ending in August, up 28% from the same period in the prior year. That growth was driven by a 7% increase in revenue and expanding gross margins in direct to consumer sales. Total net income was up 25% in the quarter to $1.4 billion.

The strong first quarter of fiscal 2020 is a sign that the "Consumer Direct Offense" strategy Nike announced in June 2017 is generating returns for the company. Nike has traditionally sold most of its products through brick-and-mortar retailers, but this new strategy prioritized speeding up innovation, producing and getting products to consumers faster and selling to and engaging with consumers more directly through digital channels. The August quarter is also typically Nike's strongest, thanks to back-to-school shopping.

Nike's stock was up more than 5% in after-hours trading Tuesday.

The company said gross margins grew to 45.7% in the quarter thanks to more profitability for Nike Direct, its direct-to-consumer business. Margins were helped, too, by higher average product selling prices, which has also been a strategic aim for the company. In 2017, as part of the Consumer Direct Offense, Nike announced the "edit to amplify" strategy to pare down its offerings and focus on better-selling styles that drive higher returns.

Further indicating the success of the Consumer Direct strategy, Nike's digital business grew 42% in the quarter, led by mobile and app experiences, Nike CEO Mark Parker said on a call with analysts Tuesday. Nike has been investing in growing the membership of its SNKRS and Nike+ apps, and integrating those apps into customers' in-store experiences.

The digital growth "shows the power of more personal relationships with consumers," Parker said.

Administrative expenses also increased in the quarter, by 9% to $3.3 billion. The majority of this is a result of investments in Nike Direct and global operations. Nike has been competing with Adidas to speed up and automate manufacturing that would help get products to customers faster and offer greater personalization.

Despite its growth, Nike has also had to contend with the ongoing US-China trade war and tariffs that threaten to jack up prices on its products for American consumers. But a new 10% tariff that went into effect September 1 on Chinese goods applies to many footwear imports. Parts of that tariff were delayed but will affect most other footwear imports if implemented December 15 as expected.

Chief Financial Officer Andy Campion told analysts Tuesday that tariffs are expected to create headwinds for the company in the coming months.

Nike's growth in the North American market, the largest market for footwear, is already slowing — up just 4% in the quarter ending in August, compared to 6% growth in the same period last year. However, sales in the fast-growing Chinese market were up 27% in the most recent quarter.

"We strongly believe in the power of free and fair trade," Parker said.

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