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NIKE (NKE) Tops Q1 Earnings, Soft Future Orders Hurt Stock

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Keeping its positive earnings surprise trend alive for the seventeenth straight quarter, NIKE Inc. NKE posted solid first-quarter fiscal 2017 results, which also saw a top-line beat after three consecutive misses. Moreover, results improved year over year, largely driven by a robust summer that saw events like the Rio Olympics and European soccer championship.

However, the results were not enough to please investors, whose negative sentiment was clearly visible from the 2.6% slip in NIKE’s shares in the after-market trading session, attributable to sluggish future orders – a significant measure of demand for the company’s products. Additionally, NIKE’s inventory position depicted a slowdown in its merchandise sales, posing concerns.

This athletic apparel, footwear and accessories retailer’s first-quarter earnings per share of 73 cents jumped nearly 9% year over year, while substantially beating the Zacks Consensus Estimate of 56 cents. Earnings were fueled by strong sales, reduced average share count, robust global momentum, operating overhead leverage and reduced tax rate, somewhat offset by a drop in gross margin and a hike in demand creation costs.

NIKE INC-B Price, Consensus and EPS Surprise

NIKE INC-B Price, Consensus and EPS Surprise | NIKE INC-B Quote


Thanks to a sporty summer that led to a spectacular international performance, revenues of this swoosh brand owner advanced 8% to $9,061 million in the reported quarter and exceeded the Zacks Consensus Estimate of $8,833 million. Further, sales grew 10% on a currency neutral basis.

Revenues of the company’s NIKE Brand surged 10% on a currency neutral basis to $8,459 million. The segment gained from a double-digit increase in Western Europe, Greater China, Central & Eastern Europe, Emerging Markets and Japan, which in turn was backed by solid growth across Sportswear, Running and the Jordan Brand.

Moreover, the NIKE brand’s Direct-to-Consumer (“DTC”) revenues improved 22% in the quarter, mainly on the back of 49% online sales growth and a 10% rise in new store increases.

Additionally, revenues at the company’s Converse brand rose 4% to $574 million on a currency neutral basis, fueled by North American growth that was partly negated by weakness noted in Europe and Asia Pacific.

Future Orders

NIKE’s global future orders for the NIKE Brand, slated for delivery from Sep 2016 through Jan 2017, went up 5% year over year to $12.3 billion. On a currency neutral basis, future orders rose 7%. However, as reported by sources, the outlook for future orders lagged analysts’ estimates and also slowed down from last year, particularly in the North American region.

Per these sources, stiff competition from rivals like Under Armour, Inc. (UA - Free Report) and Adidas AG ADDYY continues to be a pressing concern for NIKE, which is losing its market share to these sporting bigwigs. This has dented demand for NIKE’s basketball shoes and causal footwear. Apart from this, a shift in consumers’ tastes and preferences toward more fashionable assortments is also playing foul for NIKE, whose ‘athleisure’ popularity seems to be losing ground.

Costs & Margins

Gross profit improved about 3% to $4,123 million, while the gross margin shriveled 200 basis points (bps) to 45.5%. The decline in gross margin was attributable to an adverse impact from exiting Golf equipment operations, foreign currency headwinds, unfavorable off-price mix and shift of some expenses to cost of goods sold from operating overheads. This was somewhat compensated by higher average selling prices.

Selling and administrative expense escalated 12% to $2,897 million, on account of higher operating overhead costs stemming from growth in the DTC business and increased investments in infrastructure and digital capabilities, as well as rising costs for digital demand creation, brand events and sports marketing.

Balance Sheet & Shareholder-Friendly Moves

NIKE ended the quarter with cash and short-term investments of $4,787 million, long-term debt (excluding current maturities) of $1,993 million, and shareholders’ equity of $12,165 million. Inventories as of Aug 31, 2016, grew nearly 11% to $4,896 million.

During the first quarter, NIKE bought back 19 million shares for $1.1 billion under its $12 billion program that was approved in Nov 2015 and extends for a four-year term. As of quarter end, the company’s total repurchases under this program amounted to 39 million shares for roughly $2.2 billion.

Looking Forward

Though NIKE is facing various hurdles, its quarterly performance reflects its focus on adopting innovations to keep up with customer demand. While management expects foreign exchange headwinds to prevail in the future, it also remains confident of its growth drivers including efficient supply chain, enhanced connection between the digital and physical experiences, constant innovations and strategic investments – all of which are likely to boost long-term shareholder value.

Based on its own evaluation and suggestions from shareholders, management intends to alter the future order reporting sequencing. Notably, the company will no longer provide a future order update as a stand-alone metric, with its earnings release. It will instead discuss it as part of its broader outlook in its conference call, and also provide the details in its quarterly filings with the SEC.

Considering all factors, management reiterated its fiscal 2017 revenue projections, and expects the same to grow at a high single-digit rate, while on a currency neutral basis – it anticipates revenues to increase in a high single-digit to low double-digit range.

However, the company now expects gross margin for fiscal 2017 to contract, against its previous forecast of expansion in a range of 30–50 bps. SG&A expenses for fiscal 2017 are now anticipated to grow in the mid to high-single digits range, compared with a high single-digit rate projected earlier.

For the second quarter of fiscal 2017, the company expects revenues to grow in the mid single-digit range or little below its reported future order growth rate. Gross margin is projected to fall by nearly 125 bps in the quarter, mainly due to the same factors that hurt gross margin in the reported quarter. In fact, some of the negative factors will continue to prevail in the latter half of the fiscal, where management envisions gross margin rate to be flat. Further, SG&A expenses for the second quarter are estimated to grow at a low to mid-single-digit rate.

Zacks Rank

NIKE currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is Deckers Outdoor Corp. DECK, with a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

With a long-term EPS growth rate of 10.8%, Deckers has outperformed earnings estimates consistently in the last five quarters, with an average four-quarter beat of nearly 25.2%. Further, estimates for the current fiscal have witnessed an uptrend in the last 60 days.

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