A month has gone by since the last earnings report for Nike (NKE). Shares have added about 19.1% 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 catalysts.
NIKE Beats on Q2 Earnings & Revenue Estimates
NIKE delivered stellar second-quarter fiscal 2019 results, wherein earnings and sales surpassed the respective estimates. The quarter also reflected double-digit revenue growth backed by solid execution of Consumer Direct Offense. This, in turn, led to growth across all regions and provided a boost to the Wholesale and NIKE Direct businesses. Further, management issued guidance for the third quarter and updated its fiscal 2019 view.
Earnings & Revenues
The company’s earnings of 52 cents per share rose 13% year over year and surpassed the Zacks Consensus Estimate of 45 cents. With this, the company reported its 26th straight earnings beat. Solid sales growth, improved gross margin and reduced average share count aided the bottom line. However, the metric was somewhat offset by higher selling and administrative expenses, and tax rate.
Revenues increased 10% to $9,374 million, which exceeded the Zacks Consensus Estimate of $9,158 million. This outperformance was primarily driven by the company’s solid execution of the Consumer Direct Offense globally along with revenue growth (in constant currency) of 20% at international locations and 9% in North America. Additionally, continued strength in NIKE Digital, which delivered 41% growth, provided a boost to the top line. The metric grew 14% on a currency-neutral basis.
Revenues for the NIKE Brand increased 10% to $8,946 million, while constant-dollar revenues for the brand were up 14%. Results gained from continued growth in NIKE Direct and all geographic regions. Also, strength in nearly all major categories led by Sportswear alongside double-digit improvement in footwear and apparel globally fueled the top line. Specifically, the international business witnessed strong revenue growth, with 31% increase (currency-neutral) in Greater China.
Within the NIKE Brand, revenues grew 9% in North America (both on reported and currency-neutral basis) owing to solid growth across both footwear and apparel. This uptick was driven by new innovative platforms, and strong owned and partnered Digital growth. Further, the company’s wholesale business returned to growth while the Jordan brand is picking momentum.
NIKE Direct saw growth in high-single digits, whereas NIKE Digital increased more than 30% in North America.
In EMEA, the company’s revenues increased 8% (14% on a currency-neutral basis) backed by strength in sportswear, running, training and Jordan. Further, NIKE Digital reported double-digit growth.
In Greater China, NIKE continues to deliver sustained growth, having delivered 18 straight quarters of double-digit growth in the region. Revenues grew 26% year over year, up 31% on a currency-neutral basis. Results were aided by balanced growth across both footwear and apparel in China. Further, digital growth accelerated in the fiscal second quarter, courtesy of the company’s partnerships with China’s leading digital platforms – Tmall and WeChat.
In APLA, the company witnessed 2% revenue growth (up 15% on a currency-neutral basis). Balanced double-digit growth in footwear and apparel besides robust momentum in sportswear Jordan and NIKE basketball provided a boost to the top line. Further, the company delivered strong digital growth in the region, which represented the highest rate of increase across all geographies. Sales for NIKE Digital grew more than 75% in the reported quarter.
Further, revenues at the Converse Brand advanced 4% to $425 million, primarily owing to gains in Asia and digital growth. On a currency-neutral basis, the metric increased 6%.
Costs & Margins
Gross profit improved 12% to $4,105 million, while gross margin expanded 80 basis points (bps) to 43.8%. The expansion was mainly driven by an increase in average selling prices and margin growth at NIKE Direct, partly negated by escalated product costs.
Selling and administrative expenses rose 14% to $3,142 million on account of higher operating overheads and demand creation expenses. Notably, demand creation expenses increased 4% year over year to $910 million due to increased advertising and marketing costs, with higher cost of investments toward digital platforms. Operating overheads rose 18%, mainly owing to wage-related costs, reflecting investments toward the Consumer Direct Offense. Moreover, as a percentage of sales, SG&A expenses grew 110 bps to 33.5%.
Balance Sheet & Shareholder-Friendly Moves
NIKE ended the fiscal second quarter with cash and short-term investments of $4,041 million, long-term debt (excluding current maturities) of $3,466 million and shareholders’ equity of $8,729 million. As of Nov 30, 2018, inventories inched up 1% to $5,388 million.
In the fiscal second quarter, NIKE bought back 16.1 million shares for $1.3 billion under its four-year $12-billion program that was approved in November 2015. As of Nov 30, the company’s total repurchases under the program amounted to 183.3 million shares for roughly $11.3 billion.
The company also authorized a new four-year $15-billion share-repurchase program in June this year, which will commence when the existing program is completed. NIKE expects the current program to be completed within fiscal 2019.
NIKE’s management remains encouraged by solid first-half fiscal 2019. However, the company remains concerned about rising volatility and uncertainty on a macro level. Nevertheless, the company’s solid execution of the Consumer Direct Offense has been consistently aiding its performance. Going forward, this momentum is expected to consistently drive sustainable growth and boost shareholders’ value.
For fiscal 2019, the company projects revenue growth in the high-single-digit range in constant currency, thus approaching toward low-double digits. Depending on the existing foreign exchange rates, revenues are anticipated to grow more than 3 points lower than the currency neutral revenue growth or at the lower end of the high single-digit range.
The company expects gross margin expansion of 70 bps for the fiscal year, up from 50 bps guided earlier. Further, it expects SG&A expenses to increase in a high-single-digit and effective tax rate in the mid-teen range. Other expenses, net of interest expenses, are now anticipated between $50 million and $75 million for fiscal 2019 compared with $100-$125 million of expenses guided earlier.
For third-quarter fiscal 2019, the company expects robust currency-neutral revenue growth in high-single-digits. However, taking into account the FX scenario, it expects reported revenues to be about 4 points lower than the anticipated currency-neutral revenue growth.
Gross margin for the fiscal third quarter is expected to be on par with the fiscal 2019 expansion. Moreover, SG&A expenses are expected to increase in the low double-digit range, driven by strategic investments. Other expenses, net of interest expense, are likely to be $30-$40 million of expenses.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -13.62% due to these changes.
At this time, Nike has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, 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 #3 (Hold). We expect an in-line return from the stock in the next few months.
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