ii view: Nike recovery resumes after forecast-beating results

First-quarter results to 31 August

• Revenue up 1% year-over-year to $11.7 billion
• Adjusted earnings down 30% to $0.49 per share
• Share buybacks of $123 million

Guidance:

• Expects second-quarter revenue to fall by a low-single digit percentage

Chief executive Elliott Hill said:

“This quarter Nike drove progress through our Win Now actions in our priority areas of North America, Wholesale, and Running.”

“While we’re getting wins under our belt, we still have work ahead to get all sports, geographies, and channels on a similar path as we manage a dynamic operating environment. I’m confident that we have the right focus in Win Now and that our new alignment in the Sport Offense will be the key to maximising Nike, Inc.’s complete portfolio over the long-term.”

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ii round-up:

Sporting goods giant Nike Inc Class B (NYSE:NKE) detailed its first sales gain in five quarters, driven by management’s recovery focus on North America, wholesale and running. 

First-quarter sales to late August improved 1% to $11.7 billion, leaving adjusted earnings down 30% at $0.49 per share. Wall Street had expected outcomes of $11 billion and $0.27 per share respectively.

Shares in the Dow Jones company rose by 5% in reaction, having come into these latest numbers down by more than a fifth over the last year. That’s similar to European rival adidas AG (XETRA:ADS). The Dow Jones index is up by a tenth over that time.

North American sales rose 4% during the period to $5 billion. Wholesale related revenues, including sales to retailers such as JD Sports Fashion (LSE:JD.) and Dick's Sporting Goods Inc (NYSE:DKS), climbed 7% to $6.8 billion. 

Single-digit profit falls during the quarter for North America and EMEA (Europe, Middle East, Africa) sat alongside double-digit profit slumps for China and Asia.   

Donald Trump import tariffs, and given Nike’s manufacture of goods within Asia, are expected to cost it around $1.5 billion during this current second quarter. That’s up from management’s June forecast of $1 billion.  

Nike expects sales for the second quarter to late November to be down by a single-digit percentage. 

Second-quarter results are likely to be announced mid-to-late December. 

ii view:

Started as Blue Ribbon Sports by Bill Bowerman and Phil Knight in 1964, Nike today employs over 75,000 people. Footwear generated most sales over its last financial year at 66%, followed by clothes at 28% and equipment the balance of 5%. Channel wise, wholesale made 58% of sales, with direct sales and including its own stores and online demand the balance of 42%. Geographically, North America is its biggest revenue generator at 44%, followed by EMEA at 27%, China 15%, and Asia and Latin America the balance of 14%.    

For investors, a previous reliance on established brands like Jordan and product innovation from players such as New Balance has hindered sales performance. Required increased promotional activity and tariff costs resulted in a 3.2 percentage-point decline in gross profit margin to 42.2% year-over-year. High interest rates are likely leaving consumer spending appetite reduced, while a forecast price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap. 

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On the upside, a revamp of Nike under returning CEO Elliott Hill and his ‘Win Now’ programme are being pushed. Selling and administrative expenses were cut by 1% year-over-year to $4.02 billion. Hopes for more interest rate cuts persist, while a focus on shareholder returns includes an ongoing $12 billion share buyback programme and a forecast dividend yield of around 2.4%.

For now, and despite continued risks, a consensus analyst fair value estimate at just over $80 per share appears to suggest ongoing recovery hopes on Wall Street.  

Positives: 

• Product and geographical diversity
• Ongoing shareholder returns

Negatives:

• Uncertain economic outlook
• Subject to currency moves

The average rating of stock market analysts:

Buy