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Stock Analyst Update

What's Driving Nike's North America Recovery?

Innovation and digital investments have allowed the wide-moat firm return to positive growth in the region.

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We view wide-moat  Nike's (NKE) strong finish to fiscal 2018 as validating recent product innovation, speed-to-market, and direct-to-consumer investments. Similar to recent quarters, Nike's international segments (up 23% on a constant-currency basis including 25% growth from China) and digital platforms (up 41%) were key top-line contributors (total revenue up 8%), helping to drive 60 basis points of gross margin expansion to 44.7%. However, a return to positive growth in North America (up 3% compared with a 6% decline last quarter) was the clear highlight, suggesting that inventory supply/demand imbalance issues may be in the past (inventories remained very clean, up only 2%). Additionally, new cushion platforms (Nike React) and Flyknit technologies, digital assets such as NikePlus membership and the SNKRS app, and supply-chain refinements (including the North American returns facility) and predictive analytics stemming from the Zodiac acquisition position North America for sustainable growth. Coupled with its budding Amazon partnership, management's outlook calling for mid-single-digit revenue growth in North America the next few years looks achievable.

Nike's momentum heading into fiscal 2019 gives us greater confidence in its full-year guidance--including high-single-digit growth (up from the midsingle to high single digits), gross margin expansion of 50 points or more (our preliminary model is coming out at between 70-80 basis points of improvement), and SG&A expense growth at the same pace of revenue--but also leaves the door open for upside opportunities. Over the next five years, our model is aligned with management's financial targets calling for high-single-digit annual top-line growth and midteens EPS growth. We're planning a modest increase to our $70 fair value estimate for the time value of money, and while we view shares as fairly valued, we still like Nike's growth/income balance (including a new four-year $15 billion share-repurchase program).

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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.