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Analyst Blog

With summer sporting events like the Rio Olympics and the European soccer championship behind us, it's time again to gauge the winners and losers among top brands that stood out. With leading names like Nike Inc. (NKE - Analyst Report) , Adidas AG (ADDYY - Snapshot Report) and Under Armour Inc. (UA - Analyst Report) flashing everywhere during these events, it may be difficult to point out the real winner.

One will obviously take a peek into each of these companies’ earnings performance in the last reported quarter to evaluate the player that should stand at the top. That said, the first company to show up is Nike, which released its first-quarter fiscal 2017 results after the closing bell yesterday.

The leading athletic apparel retailer posted heartening results with both revenues and earnings beating estimates and improving year over year, in the fiscal first quarter. However, this was not enough to woo investors -- shares of Nike closed down 2.6% in after-hours trading yesterday following the earnings release.

What Went Wrong?

Negative investor reaction after the earnings release was primarily due to a slowdown in future orders, which came in lower than expected. Worldwide future orders as of Aug 31, 2016, grew 7% on a currency-neutral basis. The key reason for the lag in future orders was attributed to the rise of competition from Under Armour and Adidas which have been eating into Nike’s market share in key categories like basketball and casual footwear.

Another perspective from market analysts reveals that the slowdown in Nike’s future orders is also due the waning popularity of ‘athleisure’ wear. But now, with a shift in consumer tastes and preferences to more fashionable assortments, this trend seems to be on the wane.

Further, an 11% rise in inventory as of the end of the fiscal first quarter indicates that the company’s merchandise could be behind the company’s contracting gross margins. In the reported quarter, Nike’s gross margin fell 200 basis points (bps) to 45.5%. While the company attributed the decline to several factors including a higher off-price sales mix and the exiting of its golf equipment business, we believe a rise in inventory levels was also one of the reasons.

Additionally, the company expects the aforementioned factors to continue hurting gross margin in the second half of fiscal 2017, anticipating a flat gross margin rate in the second half of the fiscal year. Gross margin for the second quarter is projected to fall nearly 125 bps. Consequently, the company now expects gross margin for fiscal 2017 to contract compared with its previous forecast of a 30–50 bps expansion.

Thus, we do not recommend this Zacks Rank #3 (Hold) stock for your portfolio, at least for the time being. Instead, we have picked three apparel stocks for investors on the basis of a favorable Zacks Rank, sound Zacks Consensus Estimate revisions and sturdy fundamentals.

Our Picks

Investors can check out Francesca's Holdings Corp. (FRAN - Snapshot Report) , the operator of a chain of retail boutiques, sporting a Zacks Rank #1 (Strong Buy). The company has amassed year-over-year return of about 29.3% and surged 49.7% in the past three months.

The Houston, TX-based company delivered an average earnings beat of 15.4% over the trailing four quarters, and is expected to witness earnings growth of 8.9% in fiscal 2016 and 11.6% in fiscal 2017. Its Zacks Consensus Estimate has been on the rise over the past 30 days. The company has a long-term earnings growth rate of 13.8%.

Deckers Outdoor Corp. (DECK - Analyst Report) , a consumer goods company that designs, markets, and distributes footwear, apparel, and accessories for casual lifestyle use and high performance activities, can be a solid bet for investors. The stock has surged roughly 30.1% year to date and added 11.7% in the last three months.

The Goleta, CA-based company delivered a positive earnings surprise of 25.2% in the trailing four quarters, and has a long-term earnings growth rate of 10.8%. Further, the Zacks Consensus Estimate has been showing an uptrend over the past 60 days. Deckers Outdoor currently holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Another Zacks Rank #2 stock that investors may consider is that of Wolverine World Wide Inc. (WWW - Snapshot Report) . This is a consumer goods company that designs, manufactures, sources, markets, licenses and distributes footwear, apparel and accessories. The company’s stock has surged nearly 39.7% so far this year and gained 21.8% in the past three months.

An average positive earnings surprise of 15.8% over the trailing four quarters and long-term earnings growth rate of 12.5% make this Rockford, MI-based player an attractive investment option. The company’s Zacks Consensus Estimate has trended upward over the past 90 days.

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