It has been about a month since the last earnings report for Nike, Inc. (NKE - Free Report) . Shares have added about 9.6% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it 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 Q4 Earnings & Sales Beat, Guides FY18
NIKE reported robust fourth-quarter fiscal 2017 results. While earnings topped estimates for the 20th straight quarter, revenues turned around to post a beat compared with a miss in the prior quarter. Moreover, both the top line and bottom line improved year over year.
The company’s fourth-quarter earnings per share of $0.60 rose 22% year over year, comfortably beating the Zacks Consensus Estimate of $0.49. Earnings were fueled by sales growth, selling & administrative expense leverage, lower tax rate and a fall in share count, somewhat offset by a drop in gross margin.
Revenues of the swoosh brand owner advanced 5% to $8,677 million and surpassed the Zacks Consensus Estimate of $8,613 million primarily driven by growth at international locations and global Direct-to-Consumer (“DTC”) businesses. Sales grew 7% on a currency neutral basis.
Revenues for the NIKE Brand increased 5% to $8,127 million, while constant-dollar revenues for the brand were up 7%. Results gained from a double-digit increase in Western Europe, Greater China and Emerging Markets, along with solid growth across Sportswear and Running categories.
Moreover, the NIKE brand recorded DTC currency-neutral revenues growth of 12% in the fourth quarter and 18% for fiscal 2017. The growth in DTC revenues was mainly owing to 30% growth in online sales, 7% comparable store sales growth and addition of new stores.
Additionally, revenues at the Converse brand rose 8% to $554 million. On a currency neutral basis, revenues for the brand advanced 10% backed by market transition in Italy and solid eCommerce (DTC) growth.
Costs & Margins
Gross profit inched up 1% to $3,823 million, while the gross margin shriveled 180 bps to 44.1%. The decline in gross margin is attributable to higher product costs and foreign currency headwinds, which neutralized the gains of higher average selling prices.
Selling and administrative expense fell 4% to $2,665 million on account of lower operating overhead costs and demand creation expenses. Demand creation expenses dropped 10% as majority of the demand-related expenses were incurred in the beginning of fiscal 2017 for the Olympics and the European Football Championship. Operating overheads dropped 1% in the quarter as lower administrative costs more than mitigated the expenses related to investments in the DTC business.
Balance Sheet & Shareholder-Friendly Moves
NIKE ended fiscal 2017 with cash and short-term investments of $6,179 million, long-term debt (excluding current maturities) of $3,471 million and shareholders’ equity of $12,407 million. Inventories as of May 31, 2017, grew nearly 4% to $5,055 million.
During the fiscal fourth quarter, NIKE bought back 14.9 million shares for $820 million under its four-year $12 billion program that was approved in Nov 2015. As of May 31, the company’s total repurchases under the program amounted to 79.8 million shares for roughly $4.4 billion.
Looking ahead, the company remains on an aggressive growth path with focus on its “triple-double” strategy and the recently announced Consumer Direct Offense. The company has made significant progress on its triple double strategy focusing on doubling innovation, speed and direct connection with customers. With regard to innovations, the company’s Breaking2 initiative, ZoomX and Air VaporMax platforms have been extremely successful. Further, the company has returned to growth in the basketball shoes category driven by innovations.
With doubling speed, the company is reducing time-to-market through its Express Lane in North America, Western Europe and recent launch in Asia. This strategy ensure better demand capture, higher gross margins through more full price sales and inventory efficiency as the supply is more closely tied to real-time customer demands.
Further, doubling on direct connections involves aligning DTC and digital platforms to bring customers more close to NIKE’s products, services and experiences. This enhancement of digital platform has led the company to nearly double its revenue contributions from NIKE.com and its apps in just two years, getting over the $2 billion contribution mark. Further, it has been successful with its partnership with Zalando in Europe and TMall in China. That said, the company is ready to execute a pilot program with Amazon.com Inc. in the U.S. Under this partnership, NIKE will look to improve the NIKE brand experience on Amazon by improvising the presentation and increase the quality of storytelling.
Fiscal 2018 Outlook
The company provided a detailed guidance for fiscal 2018 and beyond taking into account the operating environment, strategic changes and the foreign currency headwinds.
For fiscal 2018, the company expects currency-neutral revenue growth in the mid-to-high single digit range, reflecting growth across all regions, with continued strength outside the U.S. Further, the company projects gross margin, excluding currency impacts, to surpass the high-end of its long-term target of 30–50 bps.
SG&A expense for the fiscal is estimated to increase in the mid-single digit range. Consequently, the company anticipates delivering another year of double-digit currency-neutral EBIT growth in fiscal 2018.
On a reported basis, the company expects currency to impact results in fiscal 2018 by nearly $700 million. Reported revenues for the fiscal are anticipated to increase in the mid-single digits, with gross margin contracting about 50 bps. Currency impacts on gross margin are expected to be higher in the first half of the fiscal.
Reported SG&A is anticipated in the mid-single digit range, including leadership and organizational realignment costs. Majority of these costs are expected to be incurred in the first half, with savings reinvested to aid growth of the company’s new offense. Other income and expense, net of interest expense, is likely to be $30–$50 million expense, while effective tax rate is anticipated in the range of 16–18%.
In first-quarter fiscal 2018, the company expects reported revenue to be flat. Gross margin is forecasted to contract 150–180 bps due to currency headwinds. SG&A expense is anticipated in the mid single-digit range, while for other income, net of interest expense, the company expects expense of $10–$20 million.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been 13 revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 27.2% due to these changes.
At this time, Nike's stock has an average Growth Score of 'C', though it is lagging a bit on the momentum front with an 'D'. Charting a same 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'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for growth based on our styles scores.
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #3 (Hold). We are looking for an in-line return from the stock in the next few months.