It has been about a month since the last earnings report for Nike (NKE). Shares have added about 1.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Nike due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
NIKE Q1 Earnings & Sales Beat Amid Tariff Woes
NIKE displayed a strong start to fiscal 2020, driven by smooth progress on its Consumer Direct Offense strategy, backed by product innovation and unmatched digital experiences. Notably, the fiscal first quarter marked the company’s return to its more than 5-year trajectory of beating earnings estimates, after a miss in the last-reported quarter. In the fiscal first quarter, NIKE’s top line surpassed estimates for the 10th straight time and earnings represented its 29th beat in the last 30 quarters.
Earnings & Revenues
In the reported quarter, earnings of 86 cents per share improved nearly 28% from the prior-year quarter and surpassed the Zacks Consensus Estimate of 71 cents. Earnings mainly benefited from robust top-line growth, coupled with enhanced gross margin and lower average share count. However, higher selling and administrative expenses were a deterrent.
Revenues increased 7% to $10,660 million and surpassed the Zacks Consensus Estimate of $10,451 million. This outperformance was primarily driven by the company’s solid execution of the Consumer Direct Offense strategy globally, which fueled robust growth across all four geographies, as well as innovation. Additionally, continued strength in NIKE digital globally, led by Greater China, drove the top line.
On a currency-neutral basis, revenues grew 10%, driven by gains from investments in innovation and digital. This resulted in robust global consumer demand-driven growth across all geographies.
Revenues for the NIKE Brand increased 7% to $10,096 million, while constant-dollar revenues for the brand were up 10%. Results gained from continued growth in NIKE direct and its wholesale business. Moreover, strength in nearly all major categories, led by sportswear and the Jordan brand, as well as improvements in footwear and apparel fueled the top line.
Within the NIKE Brand, revenues improved 4% in North America (up 4% on a currency-neutral basis), owing to continued growth in NIKE digital and strong results for the sportswear category, led by the Jordan brand. The company is gaining from efforts to reshape the North America market, with more than 30% growth in NIKE digital and high-single-digit growth across key differentiated partners. The company’s investments in delivering differentiated partner experiences are driven by efforts like testing new services and leveraging the NIKE app in partner doors.
In EMEA, the company’s revenues increased 6% (up 12% on a currency-neutral basis), backed by double-digit growth in NIKE digital and broad-based growth across all categories. Per the company, NIKE brand, being the consumers’ favorite in all key cities across EMEA, drove growth in the region. Notably, EMEA includes five of NIKE’s 12 key cities. Further, the company delivered double-digit growth in London, Berlin and Milan. Apart from NIKE digital, the company’s sustained growth in the region is fueled by partnerships like JD and Zalando.
In Greater China, the company delivered 21 straight quarters of double-digit growth. Revenues rose 22% year over year (up 27% on a currency-neutral basis). Results were aided by growth in almost all key categories, led by sportswear and Jordan. Further, the company continues to witness unmatched digital growth in the region, with NIKE digital up 70% in the reported quarter. The growth was partly aided by partnerships with Tmall and WeChat. Further, the company anticipates gaining from the launch of the NIKE app in Greater China, which is now scheduled for late second-quarter fiscal 2020.
In APLA, NIKE witnessed a 6% revenue decline (up 13% on a currency-neutral basis). Currency-neutral growth in the region was fueled by nearly 50% increase in NIKE digital. The digital business gained from the launch of the NIKE app in retail stores across key city, Tokyo. Growth was also driven by a double-digit increase in the Jordan brand, driven by the culture of basketball in the region.
Revenues at the Converse brand rose 5% to $555 million. On a currency-neutral basis, revenues of the segment were up 8%, owing to double-digit growth in Asia and strength in the global digital business, partly offset by declines in the United States. The quarter also marked the brand’s return to growth in Europe.
Costs & Margins
Gross profit rose 11% to $4,871 million, while gross margin expanded 150 basis points (bps) to 45.7%. This expansion was mainly driven by an increase in average selling prices and margin expansion in NIKE Direct, partly negated by adverse currency rates and higher product costs.
Selling and administrative expenses rose 9% to $3,328 million, driven by continued investments in digital transformation, brand marketing related to the Women's World Cup and the launch of the Joyride innovation. As a percentage of sales, SG&A expenses grew 40 bps to 31.2%. These also resulted in higher operating overheads and demand creation expenses. Notably, demand creation expenses increased 6% year over year to $1,018 million, due to increased advertising costs and sports marketing investments.
Operating overheads were up 10% to $2,310 million, reflecting higher wage-related and administrative expenses. These included continued investments in transformational initiatives, particularly in NIKE digital and global operations.
Balance Sheet & Shareholder-Friendly Moves
NIKE ended fiscal 2019 with cash and short-term investments of $3,644 million, long-term debt (excluding current maturities) of $3,463 million and shareholders’ equity of $9,200 million. As of Aug 31, 2019, inventories increased 12% to $5,835 million.
In the fiscal first quarter, NIKE bought back 11.9 million shares for $995 million, under its four-year $15-billion share repurchase program approved in June 2018. As of Aug 31, the company has repurchased 23.5 million shares for nearly $2 billion, under this program.
Despite the volatile macroeconomic and geopolitical environment, NIKE expects to continue investing in key capabilities to aid digital transformation and deliver robust growth in fiscal 2020 and beyond. Consequently, the company retained most parts of its initial guidance for fiscal 2020. It continues to expect high-single-digit revenue growth on a reported basis, slightly up from the increase witnessed in fiscal 2019.
Gross margin for the fiscal year is expected to expand 50-75 bps compared with a 50-bp expansion projected earlier. Gross margin growth for the year is likely to be partly offset by the negative impacts of the recently imposed tariffs. However, gross margin gains in the fiscal first quarter, driven by timing shifts and other discrete items, should aid growth.
The company expects SG&A expenses to increase almost in line with revenues in fiscal 2020, including a slight impact from the recent Celect buyout. Other expenses, net of interest expenses, are anticipated to increase $50-$100 million. Effective tax rate is expected to be in the mid-to-high–teens range.
For second-quarter fiscal 2020, the company expects revenue growth to be in line with the first-quarter fiscal 2020 level. On a currency-neutral basis, it expects strong revenues, despite a negative impact of nearly 3 points from foreign currency translations.
Gross margin for the fiscal second quarter is estimated to expand 25 bps, reflecting slightly higher growth than expected for the second half of fiscal 2020. The company expects pronounced impacts from the recently enacted tariffs in the fiscal second quarter.
Further, the company expects SG&A expenses to increase high-single digit. Other expenses, net of interest expenses, are anticipated to increase $10-$30 million. Effective tax rate is expected to be in the mid-teens range.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, Nike has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, 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.
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 #2 (Buy). We expect an above average return from the stock in the next few months.
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