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Analyst Blog

On March 17, 2011, Nike Inc. (NKE - Analyst Report), a sporting goods retailer, posted its third-quarter 2011 results. Street analysts had more than a week to ponder on the news.

In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts' estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.

Quarterly Review

Nike posted strong fiscal 2011 third-quarter earnings of $1.08 per share, up 7% from the year-ago earnings of $1.01 per share. However, earnings for the quarter compared unfavorably with the Zacks Consensus Estimate of $1.12 per share.

Nike’s total revenue grew 7% to $5,079 million from $4,733 million in the prior-year quarter. The company continued to benefit from its strategy of consistently focusing on innovative products that provide a competitive edge over its rivals. Revenue for the quarter fell short of the Zacks Consensus Estimate of $5,168 million.

(Read our full coverage on this earnings report: (Nike's Sound Quarter Despite Miss)

Agreement of Analysts

Estimate revision trends for the upcoming two quarters, fiscal 2011 and fiscal 2012 portrayed negative sentiments among most of the analysts covering the stock.

Over the last 7 days, all the analysts following the stock revised their estimates downward for the fourth quarter of 2011. Similarly, for fiscal 2011, 14 out of 15 analysts revisited their estimates adjusting it in the downward direction.

For the first quarter of fiscal 2012, 5 of the 9 analysts revised their estimates in the downward direction while 1 moved in the opposite direction. For fiscal 2012, 14 out of 15 analysts decreased their estimates with no upward movement.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Nike depicts a pessimistic analyst outlook for the upcoming quarters and years. Over the last 7 days estimates for the fourth quarter and fiscal 2011 have gone down by 12 cents and 14 cents, respectively. The past one week also saw first quarter and fiscal 2012 estimates suffering by 7 cents and 26 cents each. 

Our Recommendation

The reason behind the downward revision of estimates by analysts is Nike’s lower-than-expected earnings this quarter.  In spite of increasing sales, margins were affected by higher input costs. Inventories also rose 18% to $2.5 billion. However, the quarter's report should not detract from Nike's long-term strength as a company. It's a leader with a superior brand. Nike has little debt and ended the quarter with $4.5 billion of cash and short-term investments on hand. Most importantly, even in a situation of rising commodity input costs, Nike still grew profits and revenues, and is expected to continue doing so.

Given Nike’s dominance in the athletic industry and its solid fundamentals, we believe that the company has the ability to drive growth consistently. The company’s long-term strategy of aggressive emerging market expansion and focus on direct-to-consumer business as well as other brands add to our positive sentiment.

The unique amalgamation of solid balance sheet strength, free cash flow generation capability and an efficient managerial team will enhance Nike’s top-line performance in the coming quarter.

Nike’s exposure to international markets however makes the firm susceptible to currency fluctuations. The strong U.S. dollar may adversely affect the top- and bottom-line results. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside of the U.S. An increase in product price may have a direct impact on consumer demand.

Nike’s business remains highly competitive in both domestic and international markets running up against local as well as established players like Deckers Outdoor Corp. (DECK - Analyst Report), Adidas AG (including Reebok) and Puma.

We maintain our long-term “Neutral” recommendation on Nike. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no directional pressure on the stock over the near term.

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