Just do it… or don’t
Nike (NYSE:NKE) announced its fiscal third quarter earnings on Tuesday March 21. The footwear maker beat consensus estimate of $0.53EPS (earnings per share), by earning $0.68 EPS instead. That is $0.15 more than market predictions.
However, its revenue earnings of $8.43 billion fell short of market expectations, hedged at $8.47 billion instead.
This revenue failure has offset any positive news coming from its EPS performance. On March 22, the day after the earnings declarations, Nike’s stock fell by 7%.
It has recovered only partially since, mostly by bargain hunters rather than strong confidence in its shares.
The athletic brand’s revenue actually grew by 5%, but the market seemed unimpressed. In Q3-2016, Nike’s rate was 7.7%. Their growth figures mostly came from overseas. Sales in emerging markets is up by 13%, especially in Greater China (8%).
In the US, a very competitive market, sales were up only 4%.
The recent earnings report clearly shows Nike has pressured sales growth, 16% off its lifetime high.
Working through it
Analysts were also quick to raise doubts about the sports brand’s “low quality” EPS growth.
Nike’s growth came not from increased sales, but due to other intervening factors.
For instance, they took advantage of a low 13.8% tax rate, and more than half of its revenue came from low-tax regions, and places with other tax benefits.
Many analysts now see a downward trend in Nike’s gross margin, which keeps falling consistently every quarter.
In the latest earnings call, the athletic powerhouse announced a decline of 140 basis points.
It is now clear that Nike could not shake off completely the ailing factors that it struggled to manage all throughout 2016—inventory challenges (over-stocked and under-sold) leading to discounts, and competition (chiefly from Adidas and Under Armor) taking away its American market share.
This is especially worrisome for the company, as the brand’s future orders declined 4% as per reports.
Almost half of Nike’s revenue comes from the U.S. market and success at home is crucial.
The swoosh company has provided soft sales growth outlook for fourth quarter, indicating lower revenues than third quarter sales.
This, more than anything else, threatens the footwear giant’s future earnings growth potential.
Nike’s earnings figures may improve once the company adjusts its vast inventory in what the company has labeled as “edit to amplify” step.
It plans to cut 25% of its product line and focus instead on 75% of its products that bring in 99% of sales.
Plan of attack
Nike also plans to cut its product creation cycle by half, and invest more on direct-to-consumer sales, especially through digital offerings.
Nike saw a boost of e-commerce of 18%, which its CEO Mark Parker described as the “foundation” of the company’s future.
Moreover, international markets shall continue to grow for Nike, outpacing its competitors.
Nike has faced challenges before but have beat back the competition.
For example, Nike’s stock fell 18% last year due to retail challenges and heightened competition. But it recovered its losses.
“Last year we were losing share in the basketball market in North America and now we’re taking it back,” said Trevor Edwards, Nike Brand president during the earnings call.
All hands on deck
On March 29, Nike insider Eric D. Sprunk sold 50,000 Nike shares, in an attempt to boost the stocks.
Other institutional investors have also recently bought shares of the stock, including DZ Bank, Carmignac Gestion, Norges Bank, and Russell Investments Group Ltd.
Brokerages and equity analysts seem divided on their verdict of Nike.
For example, Vetr cut Nike from a rating of “strong buy” to “buy” at a price target of $ 60.36, and then upgraded them back up to “strong buy” at $63.24.
B. Riley on the other hand, stuck with a “neutral” rating with a price target of $56.00.
11 equity research analysts rated the stock as “hold”, 3 as “sell” and 24 as “buy”. Nike seems to have a consensus price target of $61.38 with a “buy” rating.
Although the stock market has been harsh on Nike for the last two weeks, Wall Street is putting its trust on it for now. While Wall Street does that, independent retailers use Nike’s performance metrics as a litmus test for their own.
On April 3rd, Nike opened at $55.73.