When it comes to investing in apparel, buying the right stocks may prove tricky. If consumers change their tastes, if fads change or if the company has one bad quarter, the stock could fall on hard times. With Nike, Inc. (NYSE:NKE), none of those things happened.

The stock is already up 15% in 2019 and may break above its 52-week high of $87.99. Though the stock is above average value on a price-to-earnings basis, it is less expensive than those in its asset class. Hence, the case can be made to invest in Nike stock, even though it is at the highs.

In its most recent second-quarter report, Nike reported earnings of 52 cents per share and total revenue of $9.37 billion, beating consensus estimates. The 9.6% year-over-year revenue growth is impressive because the company continues to drive strong results every quarter. Nike attributed the solid results to its ambitious digital transformation. Momentum in both North America and its international markets added to the growth. It sets in motion another strong 2019, as gross margin expands and share count falls.

March 21 Earnings Report

Nike succeeded in the last quarter despite increasingly challenging macro headwinds. But its investments back in the business, particularly in digital transformation, is driving profitability. The company grew revenues across all of its geographies and in NIKE Direct. NIKE Direct, its direct-to-consumer brand, aims to harness its customer data to tailor a unique experience.

That strategy is working.

In the upcoming earnings report, expect the company to report gross margin expansion. Last quarter, gross margins increased 80 basis points to 43.8%. Higher average selling prices and margin expansion from NIKE Direct lifted gross margin. Higher costs, which increased by 18% to $2.2 billion, may limit profit growth in the coming quarter. Yet, since the December period is traditionally the strongest due to the holiday season, revenue may come in stronger than expected.

EPS Estimate and Outlook

Analysts have an average EPS estimate of 63 cents, compared to a 68 cents EPS last year. Bears are willing to bet against Nike, as shares climb back to previous highs. Short interest jumped from 7.12 million shares on Jan. 30 to 10.27 million shares by Feb. 14. While the dividend yield rate is falling toward 1.00% and the P/E ratio is climbing to 28-35, Nike may still beat consensus estimates.

Nike forecast that gross margin will be better in the second half of the year. Investors should note that the last quarter was historically its lower margin period. The upcoming Q3 and Q4 periods will benefit from the higher margin.

Catalysts Ahead

Investors should not look only at the upcoming EPS when deciding if NKE stock is a buy. The stock needs positive catalysts that will lift its profitability in 2019 and beyond. As already mentioned, the digital transformation is the first big catalyst. Consumers expect more from sportswear and the macro-economy is getting even more volatile. By embracing digital solutions to increase operating efficiency, Nike is positioned to disrupt its own business.

Product innovation is another catalyst. Bringing new, exciting products is nothing new for Nike, but the company accelerated the pace at which it brought new concepts to products sold to customers.

In the shoe segment, Nike’s Element 55 and Element 87 will bring in big revenue. If the products resonate with customers in the running and basketball shoe market, sales for these specific models will perform well this year. Last quarter, Nike’s innovation for VaporMax, Air Max 270, React, and ZoomX had driven over 80% of Nike’s incremental growth.

Similar Stocks

Crocs (NASDAQ:CROX) trades at a deeper discount than Nike, with a forward P/E ratio of 18, compared to Nike’s 27. Be careful: the stock topped $31.88 in January and is on a downtrend.

Under Armour, Inc. (NYSE:UAA) is valued at ~45 times forward earnings. Its quality footwear and clothing compete with Nike goods.

Takeaway on NKE Stock

Nike has strong, positive momentum ahead of its earnings report. The stock could move higher if it beats expectations and gives investors a strong outlook. Value investors may want to sit on the sidelines because the stock is not at a discount. Then again, NKE stock rarely goes on sale.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.