NIKE Inc. NKE stock seems to be jittery following a mixed second-quarter fiscal 2018. While the company seemed composed with revenues topping year over year and the Zacks Consensus Estimate, earnings dipped year over year. Further, the company's pessimistic view for the third quarter and fiscal 2018 are probably the factors responsible for the stock's doom.
Notably, shares of the swoosh brand owner declined 0.1% since reporting earnings results on Dec 21, 2017, against the Consumer Discretionary
sector's growth of 2.7%. Moreover, the company's performance graph disappoints relative to the solid 24.4% growth witnessed in the past three months.
That said, let's discuss in detail the core reasons for the stock's dismal performance.
Nike's Earnings Comparison Hurt by Soft Margins & Higher Costs
Though the athletic apparel, footwear and accessories retailer topped earnings estimates for the 22nd straight time in the fiscal second quarter, earnings lagged year over year primarily due to gross margin reduction and SG&A deleverage. Gross margin shriveled due to foreign currency headwinds and rise in product costs per unit. Moreover, higher SG&A expenses can be attributed to increase in operating overheads and demand creation expenses.
Nike, Inc. Price, Consensus and EPS Surprise
Nike, Inc. Price, Consensus and EPS Surprise | Nike, Inc. Quote
North American Business Continues to Disappoint
While the company's overall sales performance remains impressive, sales in its key North American market continues to suffer. The company posted 5% decline in sales for North America in second-quarter fiscal 2018. Its soft sales in North America can be attributed to the lackluster product assortments, increased promotions due to growth of e-commerce and intensified competition. Moreover, the company's wholesale business in the region has been impacted due to increased focus on online sales. Moreover, we believe the overall environment is likely to remain promotional in North America, hurting the results in this segment. These trends in North America make us cautious about the company's overall performance.
Soft FY18 and Q3 Outlook
Following the mixed quarter and continued softness in North America, NIKE reiterated the previously stated soft outlook for fiscal 2018 and provided third-quarter view. For fiscal 2018, the company anticipates mid-single digits increase in revenues, with gross margin expected to contract about 50-100 basis points (bps). Additionally, SG&A expense are anticipated to increase in the mid-single digit range, including prudent operating overhead management, alongside investing in Consumer Direct offence.
Further, the company's third-quarter view also remained bleak, forecasting revenue growth of flat to slightly below the second quarter level due to the timing of new product launches coming late in the quarter. While the company anticipates the underlying drivers for gross margin to improve in the third quarter, currency headwinds and a promotional retail environment across the United States is likely to outweigh margin growth. Consequently, gross margin is projected to decline 125-175 bps in the third quarter.
Further, the company expects SG&A expense to increase in the low-double digits range in the third quarter, due to increased demand creation opportunities and higher operating overheads to boost digital capabilities.
Estimates Slide in Response to the Soft View
Influenced by the soft outlook, the Zacks Consensus Estimate for the current quarter and the fiscal years witnessed a downtrend. Estimate for the third quarter and fiscal 2018 declined by 13 cents and 3 cents, respectively, to 54 cents per share and $2.25 per share. Further, estimate for fiscal 2019 dipped by 1 cent to $2.61 per share.
Where's NIKE Heading - Is a Recovery Coming Up?
Though the softness in second quarter earnings and soft outlook are concerns, we cannot surely ignore the company's otherwise strong results, which included solid top-line growth and earnings beat. Moreover, the company's focus on strategies like Consumer Direct offense and Triple Double Strategy remain noteworthy. Furthermore, the company is poised to gain from strength in international business and the global NIKE Direct business.
Rightly, NIKE currently carries a Zacks Rank #3 (Hold). Further, the company's Growth Score of B and expected long-term earnings growth of 9.8% inspires optimism on the stock.
Looking for Some Trending Picks? Check These
Better-ranked stocks in the same industry include Rocky Brands Inc. RCKY , sporting a Zacks Rank #1 (Strong Buy), Skechers U.S.A., Inc. SKX and Steven Madden, Ltd. SHOO , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
Rocky Brands has to its credit a solid earnings surprise history with an average beat of 234.9% in the trailing four quarters. Further, the company has surged 36.8% in the last three months.
Skechers has advanced a substantial 55.5% in the last three months. The stock has a long-term growth rate of 14%.
Steven Madden has a long-term EPS growth rate of 10.3%. Moreover, the stock has returned 17.1% in the last three months.
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