Nike Picks Up Profit Pace But Hits A Wall In China

Investor's Business Daily

Nike (NKE) said earnings growth accelerated in its fourth quarter, but shares reversed late Thursday after the athletic shoe and apparel giant forecast lower China revenue in the first half of its new fiscal year.

Nike earnings grew 27% to 76 cents a share, topping analyst forecasts for 74 cents. The yearly gain was the best since 2010.

Sales rose 7% to $6.7 billion, edging forecasts for $6.64 billion.

Earnings grew faster than revenue due to gross margin expansion, a lower tax rate and a lower average share count, Nike said.

Global futures orders for Nike brand footwear and apparel for June-November delivery rose 8% vs. a year earlier to $12.1 billion.

Nike brand revenue rose 8% with growth in each product type. Sales rose in all regions except Western Europe and Greater China.

China Woes Continue

China orders rose 3% but were flat excluding currency effects. Nike expects lower Chinese revenue in Q1 and Q2, with sales stabilizing later in the year.

Overall Q1 revenue will rise in the mid- to high-single digits, Nike said. Analysts had expected an 8% rise.

"China had been a phenomenal growth region for Nike until a year ago, when the growth rate started to slow and turned negative in the fall of last year," said Susquehanna Financial Group analyst Christopher Svezia.

The macro environment in China has become more challenging, he said. Nike also has had issues with its apparel fit and style there.

Nike shares initially rose more than 3% in after-hours trading, but reversed to trade lower on the China outlook. The stock rose less than 1% during regular trading.

In Q4, revenue rose in running, basketball, men's training and women's training categories.

"What drove the profit beat was they were able to raise prices successfully, their costs to produce the product fell and sales increased in all their major categories with basketball leading," said Brian Sozzi, CEO of Belus Capital Advisors.

But Sozzi wasn't impressed: "They had an OK quarter, but it wasn't amazing," he said. "It left you wanting more.

China sales, excluding currency changes, declined 1% from a year earlier. Profit there fell 2%. And Nike still faces challenges with inventories in China, said Sozzi.

More broadly, he said: "You have to wonder if this was a quality earnings beat because their tax rate fell significantly.

Lower Costs, Pricier Shoes

After many quarters of challenging gross margins due to higher input costs of leather, cotton and other raw materials, Nike's gross margin rose 110 basis points to 43.9%. Materials costs eased while Nike was able to raise product prices, making for favorable comparisons with last year.

"The cost pressures are abating and they're finally catching up in terms of pricing increases," said Svezia. "We're starting to see their margins improve, which is helping them to drive higher profits and growth on a year-over-year basis.

U.S., Emerging Markets Solid

North America was the standout with sales, excluding the impact of currency, up 12% from a year earlier. Profits surged 29%.

"Their performance in North America has been spectacular, given their size," said Svezia. "They've been able to grow market share and see double-digit growth in North America for several quarters.

He says its market share at retail continues to accelerate in running and basketball. Market share gains, he adds, continue to translate into strong revenue growth and order growth for the North American segment.

Central and Eastern Europe saw an 11% rise in sales excluding the currency impact. Profits for that region were up 18%.

Profits in emerging markets shot up 30%. Sales, excluding the currency impact, rose 16%.

Next year's soccer World Cup in Brazil will be a big opportunity for Nike, said Sozzi.

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