It has been about a month since the last earnings report for Nike (NKE). Shares have added about 4.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Nike due for a pullback? 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 Earnings Miss Estimates in Q4, Revenues Beat
NIKE delivered fourth-quarter fiscal 2019 results, wherein earnings missed estimates while sales beat the same. 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.
Earnings & Revenues
In the reported quarter, this athletic apparel, footwear and accessory retailer’s earnings of 62 cents per share declined nearly 10% from the prior-year quarter and missed the Zacks Consensus Estimate of 66 cents. This marked a miss after 28 straight quarters of bottom-line beat. While earnings gained from solid sales growth, improved gross margin and lower average share count; higher selling and administrative expenses and tax rate were deterrents.
Revenues of the Swoosh brand owner increased 4% to $10,184 million and surpassed the Zacks Consensus Estimate of $10,154 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 provided a boost to the top line.
On a currency-neutral basis, revenues grew 10%, driven by gains from investments in innovation and digital. This aided robust global consumer demand, which was mostly led by NIKE Direct.
Revenues for the NIKE Brand increased 5% to $9,707 million while constant-dollar revenues for the brand were up 10%. Results gained from continued growth in NIKE Direct and its wholesale business. Moreover, strength in nearly all major categories, led by Sportswear, Jordan and Basketball alongside improvements in footwear and apparel, fueled top-line growth.
Within the NIKE Brand, revenues grew 7% in North America (up 8% on a currency-neutral basis), owing to continued growth in NIKE Digital and significant share gains across its wholesale partners. Further, growth was driven by continued innovation in footwear and strong demand in apparel. The company’s wholesale and NIKE Digital businesses witnessed double-digit growth in North America. Further, NIKE app’s revenues in North America are witnessing triple-digit growth.
In EMEA, the company’s revenues were flat (up 9% on a currency-neutral basis), backed by double-digit growth in NIKE Direct across footwear and apparel, and in all regions. NIKE Digital grew 35% in EMEA in the fiscal fourth quarter. The company pointed out that strength of the NIKE brand in the region helped it deliver double-digit growth in the quarter. Notably, EMEA includes five of NIKE’s key 12 cities.
In Greater China, the company continues to deliver sustained growth, having delivered 20 straight quarters of double-digit growth in the region. Revenues rose 16% year over year (up 22% on a currency-neutral basis). Results were aided by strong digital growth, with NIKE Direct up 37% in the region. Further, growth was driven by broad-based strength across men’s and women’s performance category within sportswear.
In APLA, NIKE witnessed 4% revenue decline (up 9% on a currency-neutral basis). Currency-neutral growth in the region was fueled by strength across almost all territories. The company continued to be a favorite brand in all three of the key cities in this geography — including Tokyo, Seoul and Mexico City. Further, NIKE gained from being a leading brand in Southeast Asia, delivering double-digit growth in this region. Further, the company delivered strong digital growth in APLA, driven by continued expansion of the digital ecosystem across this region and leveraging digital partnerships.
Revenues at the Converse brand declined 4% to $491 million. On a currency-neutral basis, revenues for the segment were flat, owing to double-digit growth in Asia and digital, mostly offset by declines in the United States and Europe.
Costs & Margins
Gross profit rose 6% to $4,633 million while gross margin expanded 80 basis points (bps) to 45.5%. This expansion was mainly driven by an increase in average selling prices, favorable currency rates and growth in NIKE Direct, partly negated by higher product costs and supply-chain investments.
Selling and administrative expenses rose 9% to $3,406 million on higher operating overheads and demand creation expenses. As a percentage of sales, SG&A expenses grew 150 bps to 33.4%. Notably, demand creation expenses were up 3% year over year to $1,014 million, owing to increased global brand campaigns and key sports events.
Operating overheads increased 12% to $2,392 million, reflecting higher wage-related and administrative expenses. These included continued investments in innovation, data and analytics, and new capabilities to speed up digital transformation.
Balance Sheet & Shareholder-Friendly Moves
NIKE ended fiscal 2019 with cash and short-term investments of $4,663 million, long-term debt (excluding current maturities) of $3,464 million, and shareholders’ equity of $9,040 million. As of May 31, 2019, inventories gained 7% to $5,622 million.
In the fiscal fourth quarter, NIKE bought back 10.6 million shares for $897 million under its four-year $15-billion share repurchase program approved in June 2018. In fiscal 2019, the company repurchased about 54.3 million shares for $4.3 billion, including repurchases pertaining to its current $15-billion program as well as the prior authorization of $12 billion that was approved in November 2015.
NIKE expects to continue investing in key capabilities to aid digital transformation, and deliver robust growth in fiscal 2020 and beyond. Consequently, the company retained its initial guidance for fiscal 2020. It continues to expect high-single-digit revenue growth on a reported basis, suggesting growth from the reported rise witnessed in fiscal 2019. Further, it anticipates delivering broad-based growth across all geographies, which should be within long-term targets.
Gross margin for the fiscal year is expected to expand nearly 50 bps. Gross margin growth for the year is likely to be partly offset by currency headwinds, supply-chain investments and expansion of Air manufacturing innovation.
The company expects slight SG&A leverage in fiscal 2020, owing to gains from productivity initiatives, which will offset costs related to investments. It expects SG&A expenses to grow in line with revenue growth. Other expenses, net of interest expenses, are anticipated to increase $50-$100 million. Effective tax rate is expected to be in the mid to high teens.
For first-quarter fiscal 2020, the company expects revenue growth to be in line to slightly above the level witnessed in fourth-quarter fiscal 2019. On a currency-neutral basis, revenue growth is expected to be in a high-single digit. This includes 4 points of impact from foreign currency.
Gross margin for the fiscal first quarter is estimated to be flat to expand 25 bps, fueled by robust growth in NIKE direct and strong full price sales. The company expects to deliver strong results in fiscal 2020 on brand recognition, robust innovation pipeline, and positive response from Nike Direct and wholesale partners. It projects revenue growth in a high-single digit and gross margin expansion in fiscal 2020. Currency headwinds are expected to mar gross margin by 50-70 bps in the fiscal first quarter.
Further, the company expects SG&A expenses to increase in a high-single digit, in line with currency-neutral revenue growth. Other expenses, net of interest expenses, are anticipated to increase $0-$15 million. Effective tax rate is expected to be in the mid to high teens range.
How Have Estimates Been Moving Since Then?
Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -10.58% due to these changes.
At this time, Nike has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
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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