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Nike (NKE) Up 12.4% Since Last Earnings Report: Can It Continue?
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It has been about a month since the last earnings report for Nike (NKE - Free Report) . Shares have added about 12.4% in that time frame, underperforming 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 Q3 Earnings Beat Despite Coronavirus Impact
NIKE reported better-than-expected top and bottom lines for third-quarter fiscal 2020. Moreover, the company did not provide guidance for fourth-quarter fiscal 2020 due to the uncertainty regarding the spread of COVID-19 across several countries. However, it expects fiscal 2021 performance to be in line with the long-term financial targets.
Earnings of 78 cents per share improved 14.7% from the prior-year quarter and surpassed the Zacks Consensus Estimate of 54 cents. Earnings mainly benefited from robust top-line growth across geographies, offset by the impacts of the virus outbreak on its business in Greater China.
Revenues increased 5.1% to $10,104 million and beat the Zacks Consensus Estimate of $9,871 million. On a currency-neutral basis, revenues grew 7%. The outperformance was driven by solid momentum across EMEA, APLA and North America, offset by the impact of the outbreak in Greater China. Further, the company’s top line benefited from 13% currency-neutral growth in NIKE Direct, with digital growth of 36%.
Gross profit rose 3% to $4,473 million, while gross margin contracted 80 basis points (bps) to 44.3%. The decline was mainly attributed to the impacts of COVID-19 on the company’s China business, higher rebates to wholesale partners and increased costs for factory cancellations to manage future inventory. The coronavirus outbreak in China resulted in lower sales mix in Greater China, which is the company’s high-margin geography. Additionally, gross margin was impacted by adverse currency rates and incremental tariffs in North America.
Selling and administrative expenses increased 6% to $3,283 million. As a percentage of sales, SG&A expenses deleveraged 30 bps to 32.5%. SG&A deleverage resulted from continued investment in digital transformation as well as tight operating overhead management and shift in demand creation.
Notably, demand-creation expenses increased 1% year over year to $870 million due to investments in key brands. Operating overhead expenses were up 8% to $2,413 million, reflecting wage-related expenses related to investments in data and analytics, and other transformational initiatives to accelerate end-to-end digital transformation.
Operating Segments
Revenues for the NIKE Brand increased 5% to $9,616 million, while constant-dollar revenues for the brand were up 6%. Results gained from continued double-digit growth in NIKE Direct and gains in the wholesale business. Moreover, strength in major categories like sportswear and the Jordan brand as well as improvements in footwear and apparel fueled top-line growth.
Within the NIKE Brand, revenues in North America improved 4% on reported and currency-neutral basis, owing to more than 30% growth in NIKE digital and more than 60% growth the in NIKE app. Further, the company benefited from the efforts to deliver differentiated NIKE consumer experiences, with double-digit growth each in New York City and Los Angeles.
In EMEA, the company’s revenues increased 11% (up 13% on a currency-neutral basis), backed by double-digit growth in most key categories. Further, NIKE digital grew more than 40% in EMEA. Per the company, the NIKE Brand’s growing popularity in all key cities across EMEA also drove market share for both footwear and apparel. Moreover, greater speed and agility aided growth in EMEA, reflecting more than 30% growth coming from EMEA revenues and nearly 80% of incremental growth flowing through Express Lane.
In Greater China, revenues declined 5% year over year after delivering the 22nd straight quarter of double-digit growth. Moreover, revenues dropped 4% on a currency-neutral basis. The quarterly results reflected impacts of the closure of more than 5,000 brick-and-mortar stores across Greater China in late January to protect the health and safety of teammates and consumers amid the virus outbreak. However, during the first two months of the fiscal third quarter, Greater China’s revenues grew strong in double digits. Notably, the company witnessed extraordinary momentum in China through mid-January, fueled by the launch of NIKE Digital in China in the third quarter, where it now has 5 million NIKE app downloads. Notably, digital sales in Greater China increased more than 30%.
In APLA, NIKE witnessed an 8% revenue growth (up 13% on a currency-neutral basis). Currency-neutral growth in the region was fueled by strength in key cities and was balanced across key categories, nearly all of which were up in double digits. Further, NIKE Digital increased 51% and wholesale grew in double-digits, on a currency-neutral basis, backed by growth in differentiated strategic partners.
Revenues at the Converse brand rose 9% to $506 million. On a currency-neutral basis, revenues of the segment were up 11%, owing to double-digit growth in Europe and strength in the global digital business.
Balance Sheet & Shareholder-Friendly Moves
NIKE ended third-quarter fiscal 2020 with cash and short-term investments of $3,182 million, long-term debt (excluding current maturities) of $3,463 million, and shareholders’ equity of $9,045 million. As of Feb 29, 2020, inventories increased 7% to $5,807 million, backed by strong consumer demand across all geographies and higher inventories in Greater China due to the coronavirus outbreak. In the fiscal third quarter, NIKE bought back 9.6 million shares for $957 million under its four-year share repurchase program of $15 billion approved in June 2018. As of Feb 29, it repurchased 43.3 million shares for $3.9 billion under the program.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted -41.99% due to these changes.
VGM Scores
At this time, Nike has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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Nike (NKE) Up 12.4% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Nike (NKE - Free Report) . Shares have added about 12.4% in that time frame, underperforming 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 Q3 Earnings Beat Despite Coronavirus Impact
NIKE reported better-than-expected top and bottom lines for third-quarter fiscal 2020. Moreover, the company did not provide guidance for fourth-quarter fiscal 2020 due to the uncertainty regarding the spread of COVID-19 across several countries. However, it expects fiscal 2021 performance to be in line with the long-term financial targets.
Earnings of 78 cents per share improved 14.7% from the prior-year quarter and surpassed the Zacks Consensus Estimate of 54 cents. Earnings mainly benefited from robust top-line growth across geographies, offset by the impacts of the virus outbreak on its business in Greater China.
Revenues increased 5.1% to $10,104 million and beat the Zacks Consensus Estimate of $9,871 million. On a currency-neutral basis, revenues grew 7%. The outperformance was driven by solid momentum across EMEA, APLA and North America, offset by the impact of the outbreak in Greater China. Further, the company’s top line benefited from 13% currency-neutral growth in NIKE Direct, with digital growth of 36%.
Gross profit rose 3% to $4,473 million, while gross margin contracted 80 basis points (bps) to 44.3%. The decline was mainly attributed to the impacts of COVID-19 on the company’s China business, higher rebates to wholesale partners and increased costs for factory cancellations to manage future inventory. The coronavirus outbreak in China resulted in lower sales mix in Greater China, which is the company’s high-margin geography. Additionally, gross margin was impacted by adverse currency rates and incremental tariffs in North America.
Selling and administrative expenses increased 6% to $3,283 million. As a percentage of sales, SG&A expenses deleveraged 30 bps to 32.5%. SG&A deleverage resulted from continued investment in digital transformation as well as tight operating overhead management and shift in demand creation.
Notably, demand-creation expenses increased 1% year over year to $870 million due to investments in key brands. Operating overhead expenses were up 8% to $2,413 million, reflecting wage-related expenses related to investments in data and analytics, and other transformational initiatives to accelerate end-to-end digital transformation.
Operating Segments
Revenues for the NIKE Brand increased 5% to $9,616 million, while constant-dollar revenues for the brand were up 6%. Results gained from continued double-digit growth in NIKE Direct and gains in the wholesale business. Moreover, strength in major categories like sportswear and the Jordan brand as well as improvements in footwear and apparel fueled top-line growth.
Within the NIKE Brand, revenues in North America improved 4% on reported and currency-neutral basis, owing to more than 30% growth in NIKE digital and more than 60% growth the in NIKE app. Further, the company benefited from the efforts to deliver differentiated NIKE consumer experiences, with double-digit growth each in New York City and Los Angeles.
In EMEA, the company’s revenues increased 11% (up 13% on a currency-neutral basis), backed by double-digit growth in most key categories. Further, NIKE digital grew more than 40% in EMEA. Per the company, the NIKE Brand’s growing popularity in all key cities across EMEA also drove market share for both footwear and apparel. Moreover, greater speed and agility aided growth in EMEA, reflecting more than 30% growth coming from EMEA revenues and nearly 80% of incremental growth flowing through Express Lane.
In Greater China, revenues declined 5% year over year after delivering the 22nd straight quarter of double-digit growth. Moreover, revenues dropped 4% on a currency-neutral basis. The quarterly results reflected impacts of the closure of more than 5,000 brick-and-mortar stores across Greater China in late January to protect the health and safety of teammates and consumers amid the virus outbreak. However, during the first two months of the fiscal third quarter, Greater China’s revenues grew strong in double digits. Notably, the company witnessed extraordinary momentum in China through mid-January, fueled by the launch of NIKE Digital in China in the third quarter, where it now has 5 million NIKE app downloads. Notably, digital sales in Greater China increased more than 30%.
In APLA, NIKE witnessed an 8% revenue growth (up 13% on a currency-neutral basis). Currency-neutral growth in the region was fueled by strength in key cities and was balanced across key categories, nearly all of which were up in double digits. Further, NIKE Digital increased 51% and wholesale grew in double-digits, on a currency-neutral basis, backed by growth in differentiated strategic partners.
Revenues at the Converse brand rose 9% to $506 million. On a currency-neutral basis, revenues of the segment were up 11%, owing to double-digit growth in Europe and strength in the global digital business.
Balance Sheet & Shareholder-Friendly Moves
NIKE ended third-quarter fiscal 2020 with cash and short-term investments of $3,182 million, long-term debt (excluding current maturities) of $3,463 million, and shareholders’ equity of $9,045 million. As of Feb 29, 2020, inventories increased 7% to $5,807 million, backed by strong consumer demand across all geographies and higher inventories in Greater China due to the coronavirus outbreak. In the fiscal third quarter, NIKE bought back 9.6 million shares for $957 million under its four-year share repurchase program of $15 billion approved in June 2018. As of Feb 29, it repurchased 43.3 million shares for $3.9 billion under the program.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted -41.99% due to these changes.
VGM Scores
At this time, Nike has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Nike has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.