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Nike’s Q2 Earnings Prove China Is More Important Than Ever to the Brand

Nike Inc.’s second-quarter earnings results are proving the increasing importance of China to the brand.

The sportswear giant logged profits that surged 32% to $1.1 billion, or 70 cents per share, well above forecasts for earnings of 58 cents per share. Revenues advanced 10% year over year to $10.3 billion, topping analysts’ predictions of $10.1 billion.

One of Nike’s biggest takeaways in last 90 days was the performance of Greater China, which continued its streak of double-digit growth and saw quarterly sales jump 23% on a currency-neutral basis to lead growth in the Beaverton, Ore.-based firm’s international business.

In the past couple months, the Swoosh has focused several of its growth initiatives in the region: Nike Digital, which improved 44% on a currency-neutral basis as well as the launch of its Nike app in China early this month. Further, on Singles Day, the company said that it had “exceeded our own ambitious expectations,” raking in nearly half a billion dollars in revenue.

“China is, in many ways, the world’s most compelling digital marketplace,” CEO Mark Parker said in yesterday’s conference call. “And while the digital share of the business in Greater China is larger than any other geography for Nike, we still see so much potential ahead.”

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While Nike’s posted an overall earnings beat, investors appeared to express disappointment on the firm’s gross margin, which expanded 20 basis points to 44% — missing estimates for 44.1%.

In the call, the firm noted that gains in Nike Direct were partially offset by foreign exchange headwinds and strategic supply chain investments as well as the impact of new tariffs implemented in September. (Although the White House canceled a round of tariffs scheduled for Dec. 15, a prior set of levies was imposed on Sept. 1, affecting a wide range of consumer goods hailing from China, including footwear, apparel and accessories.)

Additionally, Nike has seen a hit in Hong Kong due to a slew of store closures and a dip in tourism amid months of protests that have led the territory to enter its first recession in a decade.

“While we’re, of course, very mindful of the geopolitical dynamics in Greater China, the Nike brand continues to deeply resonate with consumers, and our growth continues to be strong and sustainable,” added EVP and CFO Andrew Campion. “The impact of geopolitical trade dynamics on foreign exchange and, more recently, tariffs do create quarterly anomalies. That said, as we all know, one quarter or one data point does not equate to a trend.”

Market watchers were also positive on Nike’s Q2 growth. In a distribution note, Susquehanna Financial Group analyst Sam Poser explained that the political turmoil between China and the United States has not led to backlash from Chinese customers.

“Our checks indicate that the Nike brand is not perceived as a U.S. brand in China. Rather, Chinese consumers view Nike as a global athletic brand not associated with any particular country or part of the world,” he said. “Nike has been entrenched in China for over three decades and has deep-rooted, well-established relationships not only with the Chinese government, but perhaps more importantly with the Chinese consumer.”

During the second quarter, North America revenues improved 5% as the company undergoes a transformation that includes the recent sale of the Hurley business. More notably, Nike’s Jordan Brand earned its first $1 billion quarter, driven by the success of its Air Jordan 1 as well as women’s and apparel categories. The firm said it was also “in the early stages of diversifying the Jordan portfolio” and pointed out the highly anticipated holiday launch of the Jordan 11 “Bred” sneaker.

For the fiscal year, Nike expects a high single-digit-percentage hike in revenues and gross margin to be roughly flat. As the brand continues to invest in China, analysts expect that the Swoosh will take even more market share from domestic players such as Li-Ning.

“In all, Nike is leading industry innovation with merchandise, marketing and digital capacities that are generating strong momentum with consumers throughout the globe, which should drive positive EPS revisions into the future,” Wedbush Securities analyst Christopher Svezia said.

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