Shares of the athletic apparel, footwear and accessories retailer, Nike, Inc. (NKE), slipped 2.9% in yesterday’s after-hours trading session after the company posted second-quarter fiscal 2015 results. Various analysts blamed soft future orders for the fall in share price.
Nike’s global future orders, slated for delivery from Dec 2014 through Apr 2015, grew 7% year over year, at the quarter-end, owing to weak global currencies. On a currency neutral basis, future orders increased 11%, lower than analyst expectations. This, in turn, indicates sluggish demand for the third quarter that led the company to tweak its guidance.
Nike now envisions gross margin for the full year to expand in a range of 100–125 basis points (bps), down from its previous guidance of 125 bps. For the third quarter, the company projects gross margin to increase by 100 bps.
Coming to the earnings, the company’s second-quarter fiscal 2015 earnings of 74 cents per share soared 25% year over year and surpassed the Zacks Consensus Estimate of 70 cents.
Results were driven by an impressive top line, improvement in gross margin and a decline in average share count, partly impacted by a rise in selling, general and administrative (SG&A) investments made in the company’s brands and business capacities.
Delving Deeper
The company’s top line surged about 15% to $7,380 million and also came ahead of the Zacks Consensus estimate of $7,161 million on the back of robust growth across all geographies and categories apart from Golf. Sales also jumped 18% on a currency neutral basis.
Revenues at the company’s NIKE Brand surged 17% year over year to $7 billion on a currency neutral basis. The segment registered growth across every product type, every region and all categories except Golf.
Further, at the company’s Converse subsidiary, revenues soared 24% to $434 million on a currency neutral basis, resulting from increased conversions in Europe and Asia as well as persistent growth in its current direct distribution centers.
Moreover, the company’s direct-to-consumer revenues soared 18% in the quarter, driven by 18% comparable-store sales growth, new stores and significantly higher Nike.com revenues.
Gross profit escalated 18% to $3,327 million with gross margin increasing 120 bps to 45.1%. The increase in gross margin was aided by a mix shift to higher margin products, decent gains from foreign exchange and sustained growth in direct-to-consumer operations with high margins, partly offset by greater product input expenses.
SG&A expenses rose 17% to $2,438 million, on account of an 11% rise in demand creation cost and a 19% surge in operating overhead costs.
Demand creation costs surged on account of marketing efforts to support product launches, other customer-related events and digital brand marketing. On the other hand, operating overhead costs were pushed by increased expenses related to the expansion of direct-to-consumer businesses and investments made toward enhancing digital capacities and operational infrastructure.
Balance Sheet
Nike ended the second quarter with cash and short-term investments of $4,713 million, compared with $5,187 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 11% to $4,150 million.
Nike’s long-term debt (excluding current maturities) stood at $1,084 million, compared with $1,201 million in the previous fiscal. Shareholders’ equity was $11,700 million at the end of the second quarter, as against $11,265 million as of Nov 30, 2013.
Share Repurchase
During the quarter, Nike bought back 5.1 million shares worth $425 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 67.6 million shares worth nearly $4.7 billion.
Outlook
Following the impressive results, Nike anticipates its constant dollar revenues for the third quarter to increase in low teens and for fiscal 2015, it continues to expect the same 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 2 to 3 points lower than the projected currency neutral revenue due to a stronger dollar.
Operating overhead expenses for the third quarter and for the full year are projected at a 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%.
Conclusion
Nike’s solid quarterly performance reflects its concentration on adopting innovations to keep up with its customers. In spite of foreign currency 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.
Nike currently carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
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), both Brown Shoe and Iconix carry a Zacks Rank #2 (Buy).
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