NIKE’s (NKE) Q4 Earnings Beat, Sales Miss; Stock Down

NIKE Inc. NKE posted fourth-quarter fiscal 2016 results, wherein its bottom line surpassed estimates for the sixteenth straight quarter. However, this Zacks Rank #4 (Sell) stock declined 4% in the after-market trading session as sales lagged the consensus estimate for the third consecutive time. Also, lower-than-expected future orders could be a factor that instilled a negative sentiment among investors.

This athletic apparel, footwear and accessories retailer’s fourth-quarter earnings per share of 49 cents remained flat year over year, while exceeding the Zacks Consensus Estimate by a penny. Earnings were fuelled by reduced average share count and robust global momentum, which was offset by a higher tax rate, a drop in gross margin and a hike in selling, general and administrative (SG&A) expenses.

Delving Deeper

Revenues of this sportswear retailer advanced 6% to $8,244 million in the quarter. However, the figure fell short of the Zacks Consensus Estimate of $8,261 million due to the impact of currency headwinds. On a currency neutral basis, sales jumped 9%.

Revenues of the company’s NIKE Brand rose 8% on a currency neutral basis to $7,725 million. The segment gained from a double-digit increase in Western Europe, Greater China, Emerging Markets and Japan, which in turn was backed by solid growth across Sportswear, Global Football and the Jordan Brand.

Moreover, the NIKE brand’s Direct-to-Consumer (“DTC”) revenues improved 23% in the quarter, mainly on the back of 39% online sales growth.

Additionally, revenues at the company’s Converse brand surged 18% to $513 million on a currency neutral basis. This increase was attributable to the shift of a major go-live system to the third quarter last year, instead of the fourth quarter. This meant more go-live orders in this year’s fourth quarter, which enhanced sales.

Also, NIKE’s global future orders for the NIKE Brand, slated for delivery from Jun 2016 through Nov 2016, went up 8% year over year to $14.9 billion. On a currency neutral basis, future orders rose 11%, reflecting rising demand for the company’s products.

However, as reported by sources, the outlook for future orders lagged analysts’ estimates, as stiff competition from rivals weighed on demand for NIKE’s basketball shoes,.

Gross profit improved about 6% to $3,786 million, while the gross margin contracted 30 basis points (bps) to 45.9%. The decline in gross margin was attributable to adverse impact from excess inventory clearance in North America, foreign currency headwinds and increased product expenses, somewhat compensated by higher average selling prices. Also, some sources revealed that the softness in gross margin was partly a result of stiff competition from rivals like Under Armour, Inc. UA and Adidas AG ADDYY.

Selling and administrative expense escalated 7% to $2,766 million, mainly on account of higher operating overhead costs stemming from growth in the DTC business and increased investments in infrastructure and digital capabilities, as well as rising costs for digital demand creation, brand events and sports marketing. This was partly offset by lower advertisement costs.

Fiscal 2016 at a Glance

The company’s earnings for fiscal 2016 came in at $2.16 per share, marking year-over-year growth of 17%, while beating the Zacks Consensus Estimate by a penny. Total revenue for the fiscal rose 6% to $32,376 million, though it missed the Zacks Consensus Estimate of $32,393 million.

Balance Sheet

NIKE ended the quarter with cash and short-term investments of $5,457 million, long-term debt (excluding current maturities) of $2,010 million, and shareholders’ equity of $12,258 million. Inventories as of May 31, 2016, grew nearly 12% to $4,838 million.

Shareholder-Friendly Moves

During the fourth quarter, NIKE bought back 9 million shares for $540 million under its new $12 billion program that was approved in Nov 2015 and extends for a four-year term. With this, the company’s total repurchases for fiscal 2016 amounted to 55.4 million shares for roughly $3.2 billion, which includes 20.1 million shares under the current $12 billion authorization.

Looking Forward

NIKE’s solid quarterly performance reflects its focus on adopting innovations to keep up with customer demand. In spite of foreign currency headwinds, the company’s results remain impressive, backed by its constant focus on exploiting growth opportunities and efficient risk management. However, management expects currency woes to prevail and impact results in fiscal 2017, more so after the Brexit.

Considering all factors, management anticipates fiscal 2017 revenue to grow at a high single-digit rate, while on a currency neutral basis, it expects the same to increase in a high single-digit to low double-digit range. The company stated that revenue in the first half of the fiscal is likely to bear a stronger impact from the fluctuating currencies than the latter half.

The company expects gross margin for fiscal 2017 to expand in a range of 30–50 bps, much in line with its long-term goals. SG&A expenses for fiscal 2017 are anticipated to grow at a high single-digit rate.

For the first quarter of fiscal 2017, the company expects revenues to grow in the mid single-digit range. Gross margin is projected to fall by nearly 100 bps in the quarter, mainly due to currency headwinds. Further, SG&A expenses are estimated to grow at a mid to high teens rate.

Stock to Consider

A better-ranked stock in the same industry is Carter's, Inc. CRI, with a Zacks Rank #2 (Buy).

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