Nike, Inc. (NKE - Get Report) stock could still be set to run away, even after a post-earnings dip

Earnings for the latest quarter were 67 cents a share, topping the consensus forecast of 63 cents. Sales rose 9.7% to just under $10 billion, again ahead of Wall Street estimates. But a lower-than-expected increase in gross margins, coupled with an apparently unconvincing assumption for growth put pressure on a stock that seems priced for perfection. 

Shares dropped by more than 2% Wednesday Sept. 26, and have come back a tad, but are still down around 1% on the day, at $83.92. Much of the muted gross margin growth was an uptick in both  material costs and labor costs, which is part of a broader inflationary environment. "Rubber costs and other product cost inflation, including labor, are weighing on gross margin during the first half of the year," Morgan Stanley analysts wrote in a note to clients Wednesday, in which they raised their price target from $88 to $103 a share. 

Those are factors tons of companies are dealing with, and Nike in particular, has several growth drivers the market may soon recognize, giving many analysts reason to say 'buy.'

International Growth

"International remains a standout, particularly in China," Guggenheim analysts, who have a 'buy' rating on the stock, wrote in a note to clients Tuesday evening. China revenue grew 20%, the analysts noted.  Whether or not Nike is topping out in China, the outlook looks strong in other parts of the globe.

Nike does have a strong presence internationally, and a Morgan Stanley note says that about 60% of its revenues are overseas. But Nike is rolling out new products in other countries, which could garner much consumer interest.  "Looking ahead, NKE will roll-out the SNKRS app in Mexico/Brazil in 2Q and bring the Nike Live retail concept to Tokyo later this fiscal year. We expect NKE to continue to drive consumer demand ahead of the 2020 Tokyo Olympics," the Guggenheim note said. 


Any good retail brand in 2018 does well when it goes digital. But simply investing in a digital revenue channel isn't fool-proof. Nike's digital sales look to be currently in growth mode. "Digital was the fastest growing channel across all geographies," Guggenheim said. Digital revenues grew 34% year-over-year. And the digital platform could drive those gross margins higher. "We are encouraged by the continued strength in digital as it is margin accretive for NKE," Guggenheim said. 

Nike has also created an engaging app that promotes its products effectively. "NKE continues to see unprecedented demand for its premium product through its SNKRS app, which has become the world's #1 footwear shopping app," the Morgan Stanley analysts said. Plus, the app could see even more growth in the future. "The app will launch in Mexico, Brazil, and Southeast Asia next quarter," Morgan Stanley said. 

Goldman Sachs said in a note to clients Tuesday evening that part of Nike's digital success is that it learns from customers well, using their data. Nike "focused on enhanced use of data, including leveraging learnings from the recently opened Melrose store whose results to date were described as "phenomenal,"" the note said. 


"We expect DTC to remain strong the remainder of FY19 and drive meaningful growth globally," Guggenheim said. "Innovation, DTC growth, and tighter supply/demand management were the main drivers of [gross margin] expansion," the note added. Part of the reason DTC is driving so much gross margin growth is because Nike is having success selling directly at full price. "Underlying gross margin remains healthy, with higher full price sales/lower off-price and strength in DTC," the note added. 

Direct-to-consumer, Morgan Stanley said, is one of the core reasons it raised its price target. "We see an increasing likelihood of our DTC driven bull case playing out which assumes a +10% 4-year revenue compound annual growth rate," the note wrote. 

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