Nike Falls on Soft Future Orders: What Wall Street's Saying

NEW YORK (TheStreet) - Nike (NKE) shares tumbled on Friday following Wall Street's concern that "future orders" for the sneaker and apparel company's merchandise were slipping.

The Beaverton, Ore.-based company said as part of its fiscal second-quarter results that worldwide future orders for Nike brand athletic footwear and apparel scheduled for delivery between December and April 2015 were 7% higher than orders reported a year earlier. Excluding currency changes, orders were up 11% -- the slowest growth pace in four quarters.

Nike reported fiscal second-quarter net income of $655 million, or 74 cents a share, compared to $534 million a year earlier. Analysts were expecting 70 cents a share. For the quarter ended Nov. 30, revenue rose 15% from last year's quarter to $7.4 billion. Nike attributed the earnings beat to gross margin expansion and a lower average share count that offset higher SG&A investments in Nike brands.

Shares were down 3.6% to $93.56 at last check on Friday. Here's what analysts said.

Christian Buss, Credit Suisse (Outperform; $105 PT)

Nike continues to deliver, with strong demand trends across regions and a return to margin expansion following a two-year period of declining margins. We continue to see opportunity for Nike to sustain low-double digit revenue growth, 40-50bp of operating margin expansion annually, and mid-teens or better earnings growth, making Nike one of the strongest large-cap investment opportunities in the global consumer apparel landscape. We adjust estimates to reflect ramping impact of foreign currency, but maintain our $105 target price.

Nike continues to maintain control of its inventories, with total inventories up 11% Y/Y on 15% sales growth, with Nike Brand wholesale inventories up 9% Y/Y. Unit inventory growth has started to accelerate, however, up 15% versus 12%, 12%, and 7% over the prior three quarters. We will be monitoring inventory controls carefully going forwards, given that control of markdowns and inventory is crucial to our thesis of consistent margin expansion through FY15 into FY16.

 

Kate McShane, Citigroup (Buy; $111 PT)

NKE delivered another beat, ~maintained FY15 guidance, and accelerated China futures, demonstrating the ability to continue driving the category offense and brand messaging across global markets, in our view. We did not consider today's incremental f/x headwinds to be a major surprise (with only 1% additional negative impact on top-line and <25bps on gross margins vs. previous guidance), as a stronger USD and continued f/x volatility should be generally w/in expectations, while NKE continues to execute well in tougher macro environments. Outside of f/x pressures, management remains focused on executing on their long-term strategy, driving innovation in product, distribution, and supply chain, and through continued investments in long-term growth through DTC expansion and demand creation. We continue to see further potential upside to our estimates from top-line leverage and repurchases, which should drive the stock over the next 12 months.

Sam Poser, Sterne Agee (Neutral)

We are lowering our FY15 EPS estimate from $3.56 to $3.46. We are lowering our FY16 EPS estimates from $4.10 to $4.03. Top-line growth continues to expand, despite difficult comparisons. Our estimate reduction is largely due to increased infrastructure investment (~$0.05 of EPS in FY15), increased FX pressure (~0.03 of EPS in FY15), and a reduction in our estimate of share repurchases (~$0.02 of EPS in FY15). Nike has a history of investing when there is sales momentum. We believe that SG&A spending and share repurchases will vary significantly from quarter to quarter, depending on the trajectory of the revenues. We are maintaining our Neutral rating as we view the current valuation of ~24x our FY16 EPS estimate to be fair. We believe that a healthy amount of optimism in regard to Nike's growth is already embedded in consensus estimates.

Camilo Lyon, Canaccord Genuity (Hold; $94 PT)

NKE reported solid FQ2 EPS of 74c vs. our 70c consensus estimate, with strong broad based growth across geographies (NA, Europe and China) and categories (basketball, sportswear, women's). Relative to our model, the beat was driven by higher revenue growth (+2c) and less expense deleverage (+4c), partially offset by lower than expected gross margin (-1c) and share count (-1c). Once again, NKE delivered solid results in footwear (+18%) and apparel (+11%). North America continued to benefit from the strength in the athletic trend with +16% growth in Q2, led by basketball (+DD), sportswear, men's/women's training and DTC (+18%). As we previewed, DTC (+30%) continued its rapid pace of growth in Q2 while e-commerce grew +66%. Gross margin continued to benefit from mix shift towards premium, higher margin product and DTC.

Similarly, rising ASPs are helping to offset increasing labor and input costs. Global futures orders of +11% CC (+6% ASPs and +5% units) were roughly in line with our 10.6% estimate and point to continued momentum in key markets such as NA (+13%) and WE (+13%). Excluding the tough ~300bp World Cup comparisons, total futures would have mirrored Q1 futures. We expect this tough WC comparison to also impact futures next quarter. Moreover, currency headwinds (particularly Euro, Argentinian Peso, Ruble and Yen) will constrain earnings in the back half of the year. As a result, the company lowered its F2015 revenue growth guidance by 100bps (+LDD but 2-3% lower on FX vs. prior guidance of +LDD but 1-2% lower on FX). Taking it altogether, Q2 was a solid quarter and is evidence of NKE's ability to drive impressive growth in most markets (ex-Mexico and Brazil). That said, the combination of mounting FX pressures, stiffening World Cup comparisons, and a rich valuation (24x our 2015 EPS estimate) suggests the risk/reward is balanced. We maintain our HOLD rating.

Dave Weiner, Deutsche Bank (Buy; $105 PT)

With NKE stock perched near all-time highs, clearly, the bar into the print was set high. While there are many moving parts to the story, overall, the company met expectations for its core business, though FX does shift to a headwind (as expected). Importantly, FY (May 2015) EPS plan remains 'largely in-line' with the prior ~20% y/y guide, though new, incremental FX pressure to revs./GM & an SG&A bump are now offset by mgmt. expectations that core, local revs. are strengthening. While the stock is down ~250bp at writing, given differentiated global rev. and margin momentum, we're comfortable with a $105 PT as the next stock hurdle.

TheStreet Ratings team rates NIKE INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate NIKE INC (NKE) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, increase in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Powered by its strong earnings growth of 26.74% and other important driving factors, this stock has surged by 26.14% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, NKE should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • NIKE INC has improved earnings per share by 26.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, NIKE INC increased its bottom line by earning $2.98 versus $2.70 in the prior year. This year, the market expects an improvement in earnings ($3.59 versus $2.98).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Textiles, Apparel & Luxury Goods industry average. The net income increased by 23.3% when compared to the same quarter one year prior, going from $780.00 million to $962.00 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 16.4%. Since the same quarter one year prior, revenues rose by 14.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • NKE's debt-to-equity ratio is very low at 0.12 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, NKE has a quick ratio of 1.70, which demonstrates the ability of the company to cover short-term liquidity needs.

 

- Written by Laurie Kulikowski in New York.

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