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NIKE (NKE) Q3 Earnings Top Estimates, Soft Q4 View Hurts Stock

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NIKE Inc. (NKE - Free Report) delivered stellar third-quarter fiscal 2019 results, wherein earnings and sales surpassed estimates. The reported quarter reflected revenue growth, backed by strength in Wholesale and NIKE Direct businesses as well as solid execution of Consumer Direct Offense, which led to growth across all regions.

However, shares of NIKE declined 4.5% in after-hours trading yesterday, owing to lower-than-expected revenues for its key North America market as well as soft view for the fiscal fourth quarter, owing to unfavorable currency. Notably, revenues for the North America region improved 7% to $3,810 million but lagged the Zacks Consensus Estimate of $3,869 million.

Driven by FX headwinds of nearly 6 points, the company expects reported revenues for the fiscal fourth quarter to be in a low-single-digit. This is largely softer compared with reported revenue growth of 13% in the prior-year quarter.

Apart from currency headwinds, the soft reported revenues guidance is attributed to the soft performance of the recently launched innovation platforms — React and Air Max 270 — as well as impacts from the World Cup. Further, gross margin growth in the fiscal fourth quarter is likely to be partly offset by currency headwinds.

Nonetheless, the company expects continued gains from the execution of the Consumer Direct Offense strategy to drive currency-neutral revenue growth in a high-single digit compared with 8% growth in fourth-quarter fiscal 2018.

Overall, this Zacks Rank #2 (Buy) stock has rallied 36.2% in the past year, outperforming the industry’s 28.3% growth.



Earnings & Revenues

In the reported quarter, this athletic apparel, footwear and accessory retailer’s earnings of 68 cents per share were flat with the prior-year quarter but surpassed the Zacks Consensus Estimate of 63 cents. This marked the 27th straight earnings beat. Results were aided by solid sales growth and improved gross margin, offset by higher selling and administrative expenses.

NIKE, Inc. Price, Consensus and EPS Surprise

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

Revenues of the Swoosh brand owner increased 7% to $9,611 million and surpassed the Zacks Consensus Estimate of $9,540.7 million. This outperformance was primarily driven by the company’s solid execution of the Consumer Direct Offense globally, which fueled robust growth across all four geographies as well as innovation. Additionally, continued strength in NIKE Digital, which delivered 36% constant-currency growth, provided a boost to the top line.

On a currency-neutral basis, revenues grew 11%, driven by double-digit currency-neutral growth in international locations and high-single-digit growth in North America.

Operating Segments

Revenues for the NIKE Brand increased 8% to $9,148 million while constant-dollar revenues for the brand were up 12%. Results gained from continued growth in NIKE Direct and its wholesale business.

Moreover, strength in nearly all major categories led by Sportswear and Jordan alongside double-digit improvements in footwear and apparel globally fueled the top line. Specifically, the international business witnessed strong revenue growth, with a 24% increase (currency-neutral) in Greater China.

Within the NIKE Brand, revenues grew 7% in North America (both on reported and currency-neutral basis) owing to solid growth in footwear, led by the Power Franchises. This uptick was also driven by innovative platforms, and strong owned and partnered Digital growth. Further, the company’s wholesale business witnessed improvement while NIKE Digital grew 30% in North America.

In EMEA, the company’s revenues increased 6% (12% on a currency-neutral basis), backed by double-digit growth in Sportswear and Jordan. Further, NIKE Digital reported double-digit growth. The company pointed out that strength of its brand in the region is the key growth driver. Notably, EMEA includes five of the company’s key 12 cities.

In Greater China, NIKE continues to deliver sustained growth, having delivered 19 straight quarters of double-digit growth in the region. Revenues grew 19% year over year, up 24% on a currency-neutral basis. Results were aided by strong digital growth, with NIKE Direct up more than 60% in the region. Further, the company witnessed double-digital growth for athletic footwear and apparel in China as sports are increasingly becoming part of the daily lives of Chinese consumers.

In APLA, NIKE witnessed 3% revenue growth (up 14% on a currency-neutral basis). Balanced double-digit constant-currency growth in footwear and apparel boosted the top line. Further, the company delivered strong digital growth in the region, driven by continued expansion of the digital ecosystem across this region and leveraging digital partnerships. Sales for NIKE Digital grew more than 60% in the reported quarter.

Revenues at the Converse brand declined 4% to $463 million. On a currency-neutral basis, revenues for the segment were down 2%.

Costs & Margins

Gross profit rose 10% to $4,339 million while gross margin expanded 130 basis points (bps) to 45.1%. This expansion was mainly driven by an increase in average selling prices, favorable currency rates and growth in NIKE Direct, partly negated by escalated product costs.

Selling and administrative expenses rose 12% to $3,091 million on higher operating overheads. Notably, demand creation expenses were flat year over year to $865 million as increased other demand creation was offset by decline in sports marketing.

Operating overheads rose 17%, reflecting continued investments in digital transformation and higher compensation-related accruals. Moreover, as a percentage of sales, SG&A expenses grew 140 bps to 32.2%.

Balance Sheet & Shareholder-Friendly Moves

NIKE ended the fiscal third quarter with cash and short-term investments of $4,046 million, long-term debt (excluding current maturities) of $3,465 million and shareholders’ equity of $8,961 million. As of Feb 28, 2019, inventories inched up 1% to $5,415 million.

In the fiscal third quarter, NIKE bought back 9.8 million shares for $754 million, completing the four-year $12-billion program that was authorized in November 2015. Subsequently, the company commenced a new four-year program to buy back shares worth $15 billion. This program was authorized in June 2018.

Outlook

NIKE expects to continue investing in key capabilities to aid digital transformation and deliver strong profitable growth in fiscal 2020 and beyond. Consequently, it provided an optimistic view for the rest of fiscal 2019 and initial insights for fiscal 2020. The company continues to expect constant-currency revenue growth and gross margin expansion in fiscal 2019.

The aforementioned fourth-quarter fiscal 2019 view is based on the following assumptions. Gross margin for the quarter is expected to expand 75 bps, benefiting from strong full-price sales and growth of its higher-margin NIKE Direct business. This is likely to be somewhat offset by higher input costs — including cotton, chemicals and labor, FX sourcing headwinds, and the shift in supply-chain investments from the fiscal third quarter to the fourth quarter.

SG&A expenses are expected to increase in the high-single-digit range, driven by strategic investments. Other expenses, net of interest expenses, are anticipated to be flat.

Backed by the current momentum, brand recognition with consumers, robust innovation pipeline and positive response from Nike Direct and wholesale partners, the company expects to deliver strong results in fiscal 2020. It projects revenue growth in a high-single digit and gross margin expansion.

Further, it expects profitability to be in line with the long-term financial outlook announced in October 2017. The company expects to provide more details on the fiscal 2020 outlook on its next earnings call.

Other Top-Ranked Stocks to Watch in the Shoes & Retail Apparel Industry

Deckers Outdoor Corp. (DECK - Free Report) has a Zacks Rank #1 (Strong Buy) at present and an expected long-term earnings growth rate of 11.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Rocky Brands, Inc. (RCKY - Free Report) delivered average positive earnings surprise of 43.6% in the trailing four quarters. Moreover, it currently sports a Zacks Rank #2.

Skechers U.S.A., Inc. (SKX - Free Report) , also a Zacks Rank #2 stock, has an expected long term earnings growth rate of 7%.

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