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Nike (NKE) Up 5.8% Since Earnings Report: Can It Continue?

Zacks Equity Research
Asbury Automotive (ABG) shares have started gaining and might continue moving higher in the near term, as indicated by solid earnings estimate revisions.

About a month has gone by since the last earnings report for Nike, Inc. NKE. Shares have added about 5.8% 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 drivers.

NIKE Q1 Earnings & Sales Beat, Outlook Soft

NIKE reported first-quarter fiscal 2018 earnings per share of 57 cents that fell 22% year over year, but surpassed the Zacks Consensus Estimate of 48 cents. The year over year decline in earnings stemmed from planned gross margin reduction and higher tax rate, offset by slight SG&A leverage and lower share count.

While the company topped earnings and sales estimates for the fiscal first quarter, earnings dipped year over year and sales remained flat. This marked the company’s 21st straight quarter of earnings beat.

Revenues of the swoosh brand owner remained flat at $9,070 million and beat the Zacks Consensus Estimate of $9,065 million, primarily driven by persistent growth at international locations and global NIKE Direct business, offset partly by soft North American Wholesale revenues. This was in line with the company’s expectations for the quarter. Top line also remained flat on a currency neutral basis.

Revenues for the NIKE Brand rose 1% to $8,585 million, while constant-dollar revenues for the brand were up 2%. Results gained from growth in Greater China; Europe, Middle East & Africa (EMEA); and Asia Pacific & Latin America (APLA), along with solid growth in the Sportswear category.

Moreover, the NIKE brand recorded NIKE Direct currency-neutral revenues growth of 11% in the first quarter. The growth in NIKE Direct revenues was mainly owing to 19% increase in online sales, 5% comparable store sales growth and addition of new stores.

Additionally, revenues at the Converse brand declined 16% to $483 million owing to fall in North American revenues. On a currency neutral basis too, revenues dipped 16%.

Costs & Margins

Gross profit declined 4% to $3,962 million, while the gross margin shriveled 180 basis points (bps) to 43.7%. The decline in gross margin is mainly attributable to foreign currency headwinds, as well as some impact from a higher mix of off-price sales.

Selling and administrative expense inched down 1% to $2,856 million on account of higher operating overhead expenses, offset by a decline in demand creation expenses. Demand creation expenses fell 18% year over year. The favorable comparison was driven by lesser investments in key sports events compared with last year. Operating overheads rose 8% in the quarter owing to realignment costs related to the workforce reduction plan announced in June, as well as continued investments in NIKE Direct.

Balance Sheet & Shareholder-Friendly Moves

NIKE ended fiscal 2017 with cash and short-term investments of $5,519 million, long-term debt (excluding current maturities) of $3,472 million and shareholders’ equity of $11,993 million. Inventories as of Aug 31, 2017, grew nearly 6% to $5,211 million.

In the fiscal first quarter, NIKE bought back 15.3 million shares for $849 million under its four-year $12 billion program that was approved in Nov 2015. As of Aug 31, the company’s total repurchases under the program amounted to 95 million shares for roughly $5.3 billion.

Outlook

Following the first quarter results, the company stated that its overall outlook for fiscal 2018 remains unchanged. Going forward, the company expects continued strength in its international business and lower impact from foreign currency, net of hedging. However, the company expects its near-term results to be hurt by the challenging retail environment in the United States.

For fiscal 2018, reported revenues for the fiscal are still anticipated to increase in the mid-single digits, with gross margin contracting about 50-100 bps.

Reported SG&A is anticipated to increase in the mid-single digit range, including prudent operating overhead management, alongside investing in its Consumer Direct offence. Other income and expense, net of interest expense, is likely to be $80 million expense, while effective tax rate is anticipated in the range of 15-17%.

In second-quarter fiscal 2018, the company expects reported revenue in the low single-digit range. The company expects decline in North America and in the Converse segment to be partly offset by strength in international business. Gross margin decline is forecasted to be in line with the first quarter, owing to persistent currency headwinds. SG&A expense is anticipated to increase in the low double digits range, while for other income, net of interest expense, the company expects expense of $30-$40 million.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been 12 revisions lower for the current quarter. In the past month, the consensus estimate has shifted down by 25.7% due to these changes.

VGM Scores

At this time, the stock has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated also 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.

Our style scores indicate investors will probably be better served looking elsewhere.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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