A month has gone by since the last earnings report for Nike (NKE). Shares have lost about 2.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Nike due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
NIKE Reports Q4 Loss, Sales Miss Estimates
NIKE reported lower-than-expected top and bottom lines for fourth-quarter fiscal 2020 due to the impacts of the coronavirus (COVID-19) outbreak across most regions. Results were marred by coronavirus-led store closures across most of the geographies, except Greater China.
Driven by the uncertainty regarding the impacts of coronavirus on the economies globally, the company did not provide any guidance for fiscal 2021. Nevertheless, the company, in general, expects some sequential improvements in the quarters ahead, as retail stores reopen and each market returns to normalized supply and demand.
Based on these assumptions, the company expects fiscal 2021 revenues to remain flat or rise from the prior year. It envisions revenues in the first half to be below the prior-year levels, but less than the decline witnessed in fourth-quarter fiscal 2020. Revenues for the second half are anticipated to improve significantly compared with the fiscal 2020 period owing to expectations of returning to normalized full-price selling across channels.
Earnings & Revenues
In the reported quarter, the athletic apparel, footwear and accessory retailer reported a loss per share of 51 cents against earnings of 62 cents in the year-ago quarter. Further, the bottom line compared unfavorably with the Zacks Consensus Estimate of earnings of 2 cents. The bottom line was affected by a top-line decline and soft gross margin due to coronavirus-related impacts, partly offset by a decrease in SG&A expenses.
Revenues of the Swoosh brand owner declined 38% to $6,313 million and missed the Zacks Consensus Estimate of $7,264 million. On a currency-neutral basis, revenues slumped 36%. The decline resulted from the closing of majority of NIKE-owned and partner stores in North America, EMEA and APLA due to the coronavirus pandemic, partially offset by growth in Greater China. Notably, the company had closed nearly 90% of its company-owned stores for eight weeks in the reported quarter to safeguard employees and consumers and prevent the spread of the virus. Furthermore, the company’s wholesale partners remained closed during the period, resulting in a 50% decline in product shipments to wholesale customers. This also led to a decline in total revenues and increased inventory levels.
However, the top line benefited from robust double-digit digital sales across all regions. Notably, digital sales increased 75% in the fiscal fourth quarter and 79% on a currency-neutral basis. Moreover, digital sales accounted for nearly 30% of total revenues in the reported quarter.
Revenues for the NIKE Brand plunged 38% to $6,012 million, while constant-dollar revenues for the brand were down 36%.
Within the NIKE Brand, revenues in North America fell 46% on a reported and currency-neutral basis due to store closures. However, NIKE digital reported 80% growth, with about triple-digit growth in the NIKE app. Notably, the NIKE app now represents 30% of the company’s business in North America. Further, retail sales for the brand grew double digits in North America, as stores began reopening in mid-May. However, the company notes that physical retail traffic remains below the prior-year levels. As of Jun 25, the company had nearly 85% of NIKE-owned stores operational in North America.
In EMEA, the company’s revenues declined 46% (down 44% on a currency-neutral basis). Meanwhile, NIKE digital grew about 100% in EMEA owing to continued brand momentum and increased new member acquisition and engagement across its Training Club and Running Club apps. Notably, it witnessed active new member growth of nearly 200%, with more than 18 million workouts logged in the reported quarter. Moreover, NIKE gained market share in both footwear and apparel during the quarter, becoming the No.1 apparel brand in key markets for the first time. With retail stores beginning to reopen in May, the company is witnessing gradual improvement in traffic and store sales in various markets. As of Jun 25, it had nearly 90% of stores operational in EMEA.
In Greater China, revenues dropped 3% year over year (up 1% on a currency-neutral basis) in the fiscal fourth quarter. Currency-neutral revenues in the quarter benefited from improvement in every month, with robust double-digit growth in May. For fiscal 2020, revenues improved 8% (11% on a currency-neutral basis), reflecting the sixth consecutive year of double-digit currency-neutral growth in the region, despite the impacts of the coronavirus outbreak in the second half of the fiscal. Digital sales in Greater China were up 53% in the fiscal fourth quarter, which outpaced the industry. Moreover, the Nike app is resonating with consumers, with nearly 11 million downloads that accounted for more than 10% of total digital demand in the fiscal fourth quarter. As of Jun 25, the company had 100% of its store fleet in Greater China open.
In APLA, NIKE witnessed a 42% revenue decline (down 39% on a currency-neutral basis) due to varied COVID-19 impacts across countries in the region. Digital sales in the region improved nearly 80%, led by strength in Japan, Korea and Brazil, with the women's category growing double the rate of men's on Nike digital. As of Jun 25, about 65% of NIKE-owned stores were operational in the region, with a higher percentage in South Korea, Japan and Australia. Meanwhile, stores in Latin America are still closed due to the ongoing efforts to combat the pandemic.
Revenues at the Converse brand declined 38% to $305 million. On a currency-neutral basis, revenues of the segment fell 36%.
Costs & Margins
Gross profit fell 49% to $2,353 million, while gross margin contracted 820 basis points (bps) to 37.3%. The decline was mainly attributed to higher product costs, which included higher tariffs in the United States and factory cancellation charges. Additionally, increased inventory obsolescence reserves adverse supply chain fixed cost rate on lower wholesale shipments volume due to COVID-19, impacted gross margins. These were, however, partly offset by higher full-price average selling prices despite increased wholesale discounts.
Selling and administrative expenses declined 6% to $3,191 million, including $178 million of incremental bad debt expenses. Lower SG&A expenses resulted from company-wide cost management initiatives like reducing marketing expenses as most sporting events were canceled and retail store closures. As a percentage of sales, SG&A expenses increased 1,710 bps to 50.5%.
Notably, demand-creation expenses fell 19% year over year to $823 million due to a shift in retail and brand marketing expenses led by cancellation or delay in sporting events owing to the pandemic. Operating overhead expenses were down 1% to $2,368 million, reflecting lower total wages and travel and related expenses, partially offset by higher bad debt expenses.
Balance Sheet & Shareholder-Friendly Moves
NIKE ended fiscal 2020 with strong liquidity, which included cash & short-term investments of $8.8 billion, up $4.1 billion from the last year. These included proceeds of the $6-billion corporate bonds issued in March, offset by share repurchasing activity in the initial ten months of the fiscal year, dividend payouts and infrastructure investments. Additionally, the company secured a new $2-billion credit facility, which adds to its existing credit facility of $2 billion, hence providing enough liquidity amid the pandemic.
Moreover, it had a long-term debt (excluding current maturities) of $9,406 million and shareholders’ equity of $8,055 million as of the end of fiscal 2020. As of May 31, 2020, inventories increased 31% to $7,367 million, reflecting the impacts of the coronavirus-led store closures in North America, EMEA and APLA as well as lower wholesale shipments in the fiscal fourth quarter.
In the fiscal fourth quarter, NIKE bought back 1.9 million shares for $159 million, before suspending share repurchase activity in March to preserve liquidity amid the pandemic.
In fiscal 2020, the company spent $4.5 billion on shareholder returns, including dividend payouts of $1.5 billion and share repurchases worth $3 billion. As of May 31, the company had repurchased about 45.2 million shares for $4.0 billion under its four-year share repurchase program of $15 billion approved in June 2018. Consequently, it had a share repurchasing capacity worth $11 billion remaining under the current program.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -37.92% due to these changes.
At this time, Nike has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Nike has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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