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North America, China Segments to Aid NIKE's (NKE) Q4 Earnings

Zacks Equity Research

NIKE Inc. NKE is slated to report top and bottom-line numbers for fourth-quarter fiscal 2019 on Jun 27. Investors are optimistic about the contributions of North America and China regions to the company’s results. However, management has warned of softness in its revenue outcome, owing to adverse impacts of currency rates, which is likely to reduce growth by 6%.

Despite the soft view, the NIKE stock has been displaying strong momentum, with shares gaining 2.4% in the past month compared with the industry’s 0.9% growth. Additionally, the stock has grown about 16.1% in the past year, owing to its positive earnings track record that keeps it in investors’ good books.

 


With that said, let’s unwind on the potential of the company’s key segments and their likely contributions to earnings this time around.

Growth to Continue in North America Business

NIKE’s North America business has returned to growth in the past year after a major downturn and has been witnessing positive results since then. Robust growth across the footwear category, driven by innovative platforms, strong owned and partnered Digital growth, is poised to boost the segment’s performance. Further, growth across sportswear, Jordan, NIKE Kids and Running categories should aid the company.

In the fiscal third quarter, NIKE’s wholesale business also witnessed improvement and NIKE Digital grew 30% in North America. On a currency-neutral and reported basis, the company reported 7% (or a high-single-digit) revenue growth in North America.

Moreover, NIKE expects the momentum in North America to continue in fiscal 2019 and beyond, driven by strong pipeline of innovative product, brand recognition and creation of digitally-led consumer experiences.

The company’s differentiated consumer experiences in North America through the rollout of the NIKE app in owned retail stores, and the testing of new services and concepts with retail partners, such as Foot Locker FL and DICK’S Sporting Goods DKS, should drive growth.

For North America, the Zacks Consensus Estimate for revenues in the fiscal fourth quarter is pegged at $4,080 million, which suggests growth of 5.3% from the year-ago reported figure.

China Holds More Potential

NIKE’s business in China is gaining pace as sports is increasingly becoming part of the daily lives of the consumers in the country. The company has been a clear beneficiary of this trend, recording the 19th consecutive quarter of high-quality, double-digit revenue growth in China. In third-quarter fiscal 2019, constant-currency revenues improved 24% in Greater China, driven by strong performance at NIKE Direct. Notably, digital sales in the country were up more than 60% in the reported quarter.

Going forward, we expect the momentum in China to continue, backed the company’s focus on creating products specifically tailored to suit preferences of consumers residing in China. Further, NIKE is working to build digital experiences to deeply connect with consumers through China’s unique digital ecosystem.

The Zacks Consensus Estimate for the company’s revenues in Greater China for the fiscal fourth quarter is pegged at $1,612 million, which suggests growth of 9.8% from the year-ago reported number.

Overall Business Trends

NIKE’s progress on the Consumer Direct Offense as well as growth in international and NIKE Direct businesses has been driving its performance for the past several quarters. The company delivered positive earnings results for over three years now. Notably, third-quarter fiscal 2019 marked the 27th straight quarter of earnings beat and eighth consecutive quarter of sales beat.

NIKE continues to seek opportunities for increasing global footprint, popularity and market share. Apart from acquiring new brands, the company has been focusing on broadening its territory through growth of e-commerce and the NIKE Direct business. Further, continued growth in North America and international regions should boost NIKE’s results in the soon-to-be-reported quarter.

Overall Earnings & Revenue Expectations

In the last reported quarter, this Zacks Rank #4 (Sell) company warned that significant adverse impacts of FX headwinds should somewhat hurt results in fourth-quarter fiscal 2019. Notably, the currency environment has turned unfavorable lately due to global trade and geopolitical dynamics, which led to strengthening of the U.S. dollar. This is likely to weigh on the company’s sales on a reported basis.

Driven by FX headwinds of nearly 6 points, NIKE 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. The soft reported revenue guidance also resulted from the dismal performance of the recently launched innovation platforms — React and Air Max 270 — as well as impacts of the World Cup.

Further, gross margin growth in the fiscal fourth quarter is likely to be partly 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 investments. Other expenses, net of interest expenses, are anticipated to remain flat.

The Zacks Consensus Estimate for the company’s earnings in the fiscal fourth quarter is pegged at 67 cents, indicating a 2.9% decline from the prior-year period. However, estimates for revenues of $10.2 billion suggest an increase of about 3.7% from the year-ago reported figure. (Read More: NIKE Q4 Earnings to Suffer From Currency Headwinds)

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