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Nike (NKE) Down 13.8% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Nike (NKE). Shares have lost about 13.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Nike due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

NIKE Q1 Earnings and Sales Top, FX Woes Hurt

NIKE once again delivered strong quarterly results, marking a splendid start to fiscal 2019. Both earnings and sales for first-quarter fiscal 2019 beat estimates. The reported quarter reflected double-digit revenue growth backed by solid execution of Consumer Direct Offense, which aided growth across all regions, alongside strength in Wholesale and NIKE Direct businesses. Most of this strength was driven by enhanced digital capabilities.

However, the company provided a somewhat disappointing guidance for fiscal 2019 and the second quarter, mainly due to impacts of FX headwinds. Notably, the currency environment has turned unfavorable lately due to the global trade and geopolitical dynamics, which has led to strengthening of the U.S. dollar. This is likely to weigh on the company's sales, on a reported basis.

Earnings & Revenues

This athletic apparel, footwear and accessory retailer's fiscal first-quarter earnings per share of 67 cents rose 18% year over year and surpassed the Zacks Consensus Estimate of 62 cents. This marked its 25th straight earnings beat. Earnings benefited from solid sales growth, improved gross margin, SG&A expense leverage and reduced share count. However, higher tax rate slightly weighed on earnings growth.

Revenues of the Swoosh brand owner have increased 10% to $9,948 million, beating the Zacks Consensus Estimate of $9,883 million. This was primarily driven by double-digit growth at international locations and 6% growth in North America. Additionally, continued strength in NIKE Digital, which delivered 36% growth, aided the top line. Net sales grew 9% on a currency-neutral basis.

Operating Segments

Revenues for the NIKE Brand increased 9.7% to $9,417 million while constant-dollar revenues for the brand were up 10%. Results gained from double-digit growth in NIKE Direct and international regions, alongside sustained momentum in North America and strength in all categories led by Sportswear. Specifically, the international business witnessed strong revenue growth, with 20% increase (currency-neutral) in Greater China. Growth across geographies was driven by NIKE Direct, including 12% currency-neutral growth at NIKE Direct and 34% currency-neutral revenue growth (36% growth on a reported basis) for NIKE Digital.

Within the NIKE Brand, revenues grew 6% in North America (both on reported and currency-neutral basis), backed by solid growth across both footwear and apparel. This was fueled by new innovative platforms, and strong owned and partnered Digital growth. Further, the company's wholesale business also returned to growth while the Jordan brand is picking momentum.

In EMEA , the company revenue increased 11% (9% on currency-neutral basis), owing to strength in Sportswear and healthy growth in Running and Jordan. Further, NIKE Digital reported double-digit growth.

In Greater China , NIKE continues to deliver sustained growth, having delivered 17 straight quarters of double-digit growth in the region. Revenues grew 24% year over year, up 20% on a currency-neutral basis, driven by strong growth in Sportswear, Jordan, Basketball, and across Women's and Young Athletes. The company is gaining from balanced growth across both footwear and apparel in China. Further, Digital growth accelerated in the fiscal first quarter, driven by the company's partnerships with China's leading digital platforms - Tmall and WeChat.

In APLA , another fast-growing region, the company witnessed 7% revenue growth (up 14% on a currency-neutral basis). It was fueled by balanced double-digit growth across footwear and apparel, led by strength in Japan, Mexico and Korea. Further, the company delivered strong Digital growth in the region, which represented the highest rate of increase across all geographies. Sales for NIKE Digital grew more than 70% in the fiscal first quarter.

Further, revenues at the Converse brand advanced 9.1% to $527 million, owing to gains in Europe and Asia. On a currency-neutral basis, revenues increased 7% driven by strong double-digit revenue growth both in Greater China and digitally.

Costs & Margins

Gross profit improved 11% to $4,397 million while gross margin expanded 50 basis points (bps) to 44.2%. The expansion occurred mainly due to an increase in average selling prices, margin growth at NIKE Direct and higher full-price sales, partly negated by escalated product costs.

Selling and administrative expenses rose 7% to $3,063 million on account of higher operating overheads and demand creation expenses. Demand creation expenses increased 13% year over year to $964 million due to higher sports marketing investments, brand campaigns and key sporting moments. Operating overheads rose 5%, owing to continued investments in capabilities for aiding Consumer Direct Offense, mostly in NIKE Direct and global operations. However, as a percentage of sales, SG&A expenses leveraged 70 bps to 30.8%.

Balance Sheet & Shareholder-Friendly Moves

NIKE ended the fiscal first quarter with cash and short-term investments of $4,269 million, long-term debt (excluding current maturities) of $3,467 million and shareholders' equity of $8,992 million. Inventories as of Aug 31, 2018, grew nearly 0.3% to $5,227 million.

In the fiscal first quarter, NIKE bought back 17.8 million shares for $1.4 billion under its four-year $12-billion program that was approved in November 2015. As of Aug 31, the company's total repurchases under the program amounted to 167.2 million shares for roughly $10.1 billion.

The company also authorized a new four-year $15-billion share-repurchase program in June, which will commence when the existing program is completed. It expects the current program to be completed within fiscal 2019.

Outlook

NIKE's management remains encouraged by stronger-than-expected start to fiscal 2019. However, the company notes that global trade uncertainty and geopolitical dynamics have led to strengthening of the U.S. dollar in the last 90 days. This turned foreign exchange into a headwind. Consequently, the company has reiterated its guidance for fiscal 2019.

Though the company maintained revenue growth guidance in the high-single-digit range, it anticipates results to come at the lower end of this range. This is because operating gains are likely to be offset by FX headwinds due to stronger dollar.

The company expects gross margin expansion of 50 bps or slightly higher. Further, it expects SG&A expenses to increase in a high-single digit and effective tax rate in the mid-teen range. Other expenses, net of interest expenses, are now anticipated to be $100-$125 million of expenses in fiscal 2019 compared with the previous guidance of $125-$150 million of expense.

For second-quarter fiscal 2019, the company expects currency-neutral revenue growth of 9%, in line with the fiscal first quarter. However, taking into account the FX scenario, it expects reported revenues to be 2-3 points lower than the anticipated currency-neutral revenue growth.

Gross margin for the fiscal second quarter is expected to be on par with the expansion witnessed in the first quarter. However, the company continues to anticipate lesser gross margin expansion in the first half of fiscal 2019 compared with the second half.

Moreover, SG&A expenses for the fiscal second quarter is expected to increase about low-teens, driven by timing of investments in sports marketing and strategic investments in new digital capabilities. Other expenses, net of interest expense, are likely to be $30-$40 million of expense.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -14.35% due to these changes.

VGM Scores

At this time, Nike has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Nike has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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