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NIKE (NKE) Rallies on Q3 Earnings & Sales Beat, Buys Zodiac

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Shares of NIKE Inc. (NKE - Free Report) advanced 6.2% in the after-hours session yesterday as its earnings and sales topped estimates in third-quarter fiscal 2018. Further, its results reflected a significant progress in Consumer Direct Offense, positioning it for strong profitable growth in the future.

During the quarter, the company’s revenues and gross margin exceeded guidance, driven by the launch of new products and innovation platforms that will scale over time. This resulted in double-digit revenue growth across international geographies, led by Greater China. Further, the company closed the third quarter with expectations of a trend reversal in North America business in the fourth quarter, backed by the introduction of new innovation platforms and differentiated customer experiences in the marketplace.

Concurrent with the earnings release, the company announced the acquisition of a leading data analytics firm, Zodiac Inc. This is likely to accelerate its Consumer Direct Offense strategy by contributing to the 2x speed factor of the plan. The company targets to serving customers faster and providing a more personalized experience across the globe with a particular focus on Nike+ members.

However, NIKE’s stock has declined 7.5% in the past month, wider than the industry’s fall of 4.5%.



Earnings & Revenues

This athletic apparel, footwear and accessories retailer’s third-quarter earnings per share of 68 cents were flat year over year but surpassed the Zacks Consensus Estimate of 52 cents. This marked its 23rd straight earnings beat.

NIKE, Inc. Price, Consensus and EPS Surprise

NIKE, Inc. Price, Consensus and EPS Surprise | NIKE, Inc. Quote

Revenues of the swoosh brand owner have increased 6.5% to $8,984 million, beating the Zacks Consensus Estimate of $8,831.8 million. This was primarily driven by double-digit growth at international locations and global NKE Direct business, partly offset by soft North American Wholesale revenues. Sales grew 3% on a currency-neutral basis.

Revenues for the NIKE Brand increased 7.2% to $8,495 million while constant-dollar revenues for the brand were up 4%. Results gained from significant growth in Greater China; followed by an increase in Europe, Middle East & Africa (“EMEA”); and the Asia Pacific & Latin America (“APLA”). Additionally, the company witnessed double-digit growth in NIKE Direct and continued momentum in Sportswear as well as NIKE Basketball categories which aided revenues.

Notably, the NIKE brand recorded NKE Direct currency-neutral revenue growth of 18% in the fiscal third quarter. The growth in NKE Direct revenues was backed by the expansion of digital apps in international markets and the launch of Nike+ membership in North America.

However, revenues at the Converse brand dropped 3% to $483 million, owing to the fall in North American revenues. This was partially offset by the strong international and digital revenues. On a currency-neutral basis, revenues declined 8%.

Costs & Margins

Gross profit improved 5% to $3,938 million while gross margin shriveled 70 basis points (bps) to 43.8%. The decline in gross margin can mainly be attributable to foreign currency headwinds, offset by lower product costs.

Selling and administrative expenses rose 11% to $2,767 million on account of higher operating overheads and demand creation expenses. Demand creation expenses increased 15% year over year to $862 million due to higher sports marketing, brand moments and new innovation launches. Operating overheads rose 9% in the quarter, owing to higher administrative expenses as well as continued investments in global digital capabilities and the Nike+ membership program.

Balance Sheet & Shareholder-Friendly Moves

NIKE ended third-quarter fiscal 2018 with cash and short-term investments of $4,751 million, long-term debt (excluding current maturities) of $3,469 million and shareholders’ equity of $9,782 million. Inventories as of Feb 28, 2018, grew nearly 9% to $5,366 million.

In fiscal third-quarter, NIKE bought back 14.6 million shares for $962 million under its four-year $12 billion program that was approved in November 2015. As of Feb 28, the company’s total repurchases under the program amounted to 126.4 million shares for roughly $7.2 billion.

Outlook

Going forward, the company stated that its overall outlook for fiscal 2018 remains unchanged, excluding the one-time impact of the U.S. tax reform. Further, it provided expectations for fourth-quarter fiscal 2018 and initial view for fiscal 2019.

In fourth-quarter fiscal 2018, the company expects reported revenue growth of high single-digit, backed by persistent strength in international regions and reversal of the trend in North America. Revenue growth in North America is now anticipated to be nearly flat compared with the prior-year quarter, with expectations to return to growth in the first half of fiscal 2019.

Gross margin is projected to be flat to up slightly, with progressively stronger currency-neutral growth. Further, the company expects SG&A expenses to increase in the low-teens range in the fourth quarter, driven by continued investments in digital and membership. This will include the acquisition of some key digital capabilities alongside brand marketing and supportive innovations as well as some impactful customer moments.

Other income and expense, net of interest expense, is likely to be about $30-$40 million of expense. Moreover, the company anticipates an effective tax rate of 10-12%.

The company’s initial guidance for fiscal 2019 points to anticipated reported revenue growth of mid-to-high single-digit, driven by North America’s return to growth and the continued momentum in the international arena. Further, the company expects strong gross-margin expansion which should be almost in line with its long-term financial model. It also expects to provide a detailed outlook for fiscal 2019 while reporting fourth-quarter fiscal 2018 results.

Zacks Rank & Stocks to Consider

NIKE currently carries a Zacks Rank #3 (Sell). Some better-ranked stocks in the same industry include Decker’s Outdoor Corporation (DECK - Free Report) and Rocky Brands, Inc. (RCKY - Free Report) with a Zacks Rank #1 (Strong Buy), and Skechers U.S.A., Inc. (SKX - Free Report) carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Decker’s, with long-term earnings per share growth rate of 11.6%, surged 14.2% in the last three months.

Rocky Brands has delivered average positive earnings surprise of 256.4% in the trailing four quarters. Further, the stock returned 10.2% in the last three months.

Skechers advanced a substantial 60.6% in the last six months. The stock has a long-term growth rate of 15%.

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