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NIKE's (NKE) North America Unit Drives Q1 Earnings, Stock Up

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Shares of NIKE Inc. (NKE - Free Report) have soared 10.2% in the after-hours session, yesterday, as both earnings and sales topped estimates in fourth-quarter fiscal 2018. The reported quarter reflected significant momentum, backed by solid execution of Consumer Direct Offense — due to innovation and focus on direct-to-customer. These efforts helped return North America business to growth in the fiscal fourth quarter while also driving growth at international and NIKE Direct businesses.

Moreover, NIKE’s stock has rallied 14.6% year to date, surpassing the industry’s increase of 11.5%.



Earnings & Revenues

This athletic apparel, footwear and accessory retailer’s fourth-quarter earnings per share of 69 cents rose 15% year over year and surpassed the Zacks Consensus Estimate of 64 cents. This marked its 24th straight earnings beat. Earnings benefited from solid sales growth, improved gross margin, lower tax rate and reduced share count. However, higher SG&A expenses slightly weighed on earnings growth.

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 13% to $9,789 million, beating the Zacks Consensus Estimate of $9,393 million. This was primarily driven by double-digit growth at international locations and global NKE Direct business as well as a return to growth in North America. Sales grew 8% on a currency-neutral basis.

Revenues for the NIKE Brand increased 14% to $9,269 million while constant-dollar revenues for the brand were up 9%. Results gained from double-digit growth in NIKE Direct and international regions as well as Sportswear and Global Football. Further, return to healthy, sustainable growth in North America aided results.

Specifically, the international business witnessed 23% growth, with 35% increase in Greater China. NKE Direct grew 41%, with currency-neutral revenue growth of 34% in the fiscal fourth quarter. Growth in international and digital businesses was mainly driven by the execution of Consumer Direct Offense — mostly new product launches and focus on direct-to-customer. Additionally, the company’s 3% revenue growth in North America was backed by innovative platforms, strong Digital growth, sustained momentum in Sportswear and growth across Apparel business.

However, revenues at the Converse brand dropped 8% to $512 million, owing to declines in all territories except Asia. On a currency-neutral basis, revenues declined 14%.

Costs & Margins

Gross profit improved 15% to $4,378 million while gross margin expanded 60 basis points (bps) to 44.7%. The expansion occurred mainly due to an increase in average selling prices, margin growth at NIKE Direct and higher full-price sales.

Selling and administrative expenses rose 17% to $3,120 million on account of higher operating overheads and demand creation expenses. Demand creation expenses increased 25% year over year to $983 million due to higher sports marketing investments, brand campaigns and new product launches alongside increased foreign-currency headwinds. Operating overheads rose 14%, owing to continued investments in global operations and capabilities to aid Consumer Direct Offense as well as unfavorable currency rates.

Balance Sheet & Shareholder-Friendly Moves

NIKE ended fiscal 2018 with cash and short-term investments of $5,245 million, long-term debt (excluding current maturities) of $3,468 million, and shareholders’ equity of $9,812 million. Inventories as of May 31, 2018, grew nearly 4% to $5,261 million.

In the fiscal fourth quarter, NIKE bought back 23.1 million shares for $1.6 billion under its four-year $12-billion program that was approved in November 2015. As of May 31, the company’s total repurchases under the program amounted to 149.4 million shares for roughly $8.7 billion.

The company has also authorized a new four-year $15-billion share-repurchase program, which will start when the existing program is completed. The company expects the current program to be completed within fiscal 2019.

Outlook

Following a strong fiscal fourth quarter, the return of North America to growth and continued progress on its Consumer Direct Offense, the company raised its revenue guidance for fiscal 2019. The company now expects revenue growth in a high-single digit compared with its initial guidance of mid-to-high single digit growth. The raised view is mainly driven by the increasing consumer demand for NIKE. However, currency rates may remain headwinds for the company.

Further, the company expects gross margin expansion of 50 bps or slightly higher, backed by more full-price sales, higher average selling prices and growth in NIKE Direct business, partly negated by increased input costs. Further, the company expects SG&A expenses to increase nearly at par with revenue growth but it is not targeting SG&A leverage. Increased investments in digital experiences and capabilities, product innovation, and brand marketing should result in higher SG&A expenses. Other expenses, net of interest expenses, are anticipated to be $125-$150 million of expenses in fiscal 2019.

For first-quarter fiscal 2019, the company expects revenue growth to be in line with the fiscal 2019 forecast. Gross margin expansion in the first half of fiscal 2019 is expected to be lesser than the second half. Moreover, SG&A expenses will be higher in the first half, due to increased investments, owing to key consumer and sports events like the World Cup.

Zacks Rank & Stocks to Consider

NIKE currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry are Decker’s Outdoor Corporation (DECK - Free Report) , sporting a Zacks Rank #1 (Strong Buy), Iconix Brand Group, Inc. and Wolverine World Wide, Inc. (WWW - Free Report) , both 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 12.2%, surged 28.9% in the last three months.

Iconix Brand Group has delivered average positive earnings surprise of 188.2% in the trailing four quarters. Further, the company has a VGM Score of A.

Wolverine World Wide has advanced 22.4% in the last three months. The stock has a long-term growth rate of 10%.

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