Shares of the athletic apparel, footwear and accessories retailer, Nike Inc. (NKE), surged 7.34% in yesterdays’ after- hours trading session after the company posted better-than-expected first-quarter fiscal 2015 results accompanied by an encouraging guidance.
The sports gear giant, reported earnings of $1.09 per share for the first quarter, which increased 27% year over year and surpassed the Zacks Consensus Estimate of 88 cents by 21 cents.
Results were driven by an impressive top line, improvement in gross margin, lower tax rate and a decline in average share count. The company’s success in the quarter is mainly attributable to the improved sports gear sales during the soccer World Cup season and the increasing trend of wearing fitness clothes outside the gym, which contributed to top-line growth.
Delving Deeper
The company’s top line surged about 15% to $7,982 million and also came ahead of the Zacks Consensus estimate of $7,804 million on the back of robust demand for its brands and significant growth in its main categories and all of its locations. Sales also jumped 15% on a currency neutral basis.
Revenue at the company’s NIKE Brand soared 15% year over year to $7.4 billion on a currency neutral basis. The segment registered growth across every product type, every region and all categories except Action Sports and Golf.
Further, at the company’s Converse subsidiary, revenues soared 16% to $575 million on a currency neutral basis, resulting from increased conversions in Europe and Asia as well as solid performance in its primary direct distribution centers – the U.S. and UK.
Moreover, the company’s direct-to-consumer revenues soared 22% in the quarter driven by 11% comp-store sales growth and significantly higher Nike. com revenues.
Gross profit escalated 19% to $3,721 million with gross margin increasing 170 basis points (bps) to 46.6%. Increase in gross margin was aided by a mix shift to higher margin products, superior average prices and sustained growth in the direct-to-consumer operations with high margins, partly offset by greater product input expenses.
SG&A expenses rose 21% to $2,480 million, on account of a 23% rise in demand creation cost and a 19% surge in operating overhead costs.
Demand creation costs surged due to investment in World Cup-themed commercials. On the other hand, operating overhead costs were pushed by increased expenses related to the expansion of direct to consumer business and investments made in enhancing operational infrastructure.
Balance Sheet
Nike ended the first quarter with cash and short-term investments of $4,579 million, compared with $5,578 million last year. Higher share repurchases and dividend payments as well as increased capital investment more than offset the higher net income benefit. Inventories improved 14% to $4,030 million.
Nike’s long-term debt (excluding current maturities) stood at $1,195 million, compared with $1,207 million in the previous fiscal. Shareholders’ equity was $11,105 million at the end of the first quarter, as against $11,206 million as of Aug 31, 2013.
Share Repurchase
During the quarter, Nike bought back 10.6 million shares worth $819 million. This buyback was part of the 4-year authorization worth $8 billion, approved by the company’s board in Sep 2012. So far under the program, the company has bought back 62.5 million shares worth nearly $4.2 billion.
Future Orders
The company’s global future orders, slated to be delivered between Sep 2014–Jan 2015, soared 11% from the comparable prior-year period. On a currency neutral basis future orders increased 14%.
Outlook
Following a strong start to fiscal 2015, the company expects the rest of the year to display strength driven by momentum in sales and earnings per share as well as continued investment in growth strategies.
Nike anticipates its constant dollar revenues for the second quarter and fiscal 2015 to grow in the low-double-digits range on the back of strong customer demand in its largest markets and categories, specifically in the direct-to-consumer business. On a reported basis, revenue is expected to grow 1 to 2 points lower than the projected currency neutral revenue due to a stronger dollar.
The company raised its expectation for second-quarter gross margin, projecting a growth of 125 to 150 bps driven by the progress in its strategies aimed at improving average selling prices as well as continued growth in its high margin businesses, specifically direct-to-consumer. For fiscal 2015, the company now expects gross margin to expand about 125 bps versus 75 bps growth projected earlier.
Driven by the solid progress in its growth strategies and its commitment to continue with these investments, the company expects demand creation to record low double-digit growth in the second quarter and high single-digit growth in fiscal 2015.
Operating overhead expenses for the second quarter are projected at a high-teens rate, while for the full year it is expected to range between mid-to high-teens rate. This cost guidance is based on increased variable direct-to-consumer expenses and investments in digital innovation and key operating capabilities. The company’s effective tax rate for fiscal 2015 will be nearly 24.5%.
Consequently, the company now projects second-quarter earnings per share to grow at a high-teens rate, while it is expected to surge nearly 20% in fiscal 2015. The company’s earnings forecast is based on continued top-line growth and gross margin expansion, offset by increased investments in its largest growth drivers.
Conclusion
Nike’s solid quarterly performance reflects its concentration on adopting innovations to keep up with its customers. In spite of macroeconomic headwinds, the company’s results remain impressive, backed by its continuous focus on exploiting growth opportunities along with efficient risk management. Going forward, Nike plans to follow these standards in order to enhance shareholder value in the long run.
However, we remain slightly uncertain about the company’s future performance due to unfavorable currency fluctuations coupled with the impact of recent currency devaluation in developing markets. Further, we expect soft discretionary spending and intense competition from its peers amid rapidly changing customer preferences to undermine Nike’s future prospects.
Therefore, Nike currently carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Other better-ranked stocks in the apparel-shoe industry include Skechers USA Inc. (SKX), Brown Shoe Co. Inc. (BWS) and Iconix Brand Group Inc. (ICON). While Skechers sports a Zacks Rank #1 (Strong Buy), Brown Shoe and Iconix carry a Zacks Rank #2 (Buy).
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