Why Nike's Shares Are Plunging After a Monster Earnings Beat

This article, originally published at 4:59 p.m. on Tuesday, March 22, has been updated with information from the company's earnings call and analyst comments.

Nike (NKE) didn't quite slam-dunk its latest earnings report, sending shares down 6% in premarket trading on Wednesday.

The footwear and apparel giant reported profit of 55 cents a share for the third quarter ended Feb. 29, surpassing forecasts of 49 cents a share, as well as double-digit sales growth -- excluding the impact of the strong U.S. dollar -- in every region where it operates. The standout was Central Europe, where revenue increased 29% from the previous year. Nike's footwear business led the charge in each country, outperforming the company's apparel and equipment businesses. 

Still, total revenue of $8.03 billion fell short of estimates for $8.2 billion. Here's a look at other issues that may have disturbed investors:

1. -- Nike's overall futures orders miss forecasts. Excluding the impact of the strong dollar, Nike's future orders rose 16.1%, trailing expectations for 17% growth. Future orders measure Nike brand footwear and apparel scheduled for delivery from March through July.

2. -- Nike's future orders in North America miss forecasts. Nike's future orders in North America increased 10%, falling short of estimates for 11.6% growth.  

That indicates, in part, the post-holiday consumer spending slowdown that has caused retailers such as Macy's (M) and J.C. Penney (JCP) to take cautious inventory positions with suppliers such as Nike. Second, Nike is seeing lackluster growth in its bread-and-butter basketball sneaker business, as TheStreet recently reported. Nike fanned that concern by noting in its earnings release that gross profit margins were hurt by the "impact of clearing excess inventory in North America." 

On a call with analysts, Nike didn't disclose sales trends in North America for its core basketball business, nor make much mention of its performance during the quarter.  Instead, the company highlighted solid demand in North America for the Jordan brand and products for women. 

"The Jordan business is exceptionally strong, while the Nike basketball business has been soft -- it's an item issue as [offerings from] Kobe Bryant, Kevin Durant and Lebron James did not do as well last year," said Sam Poser, a veteran footwear industry analyst and managing director at Sterne Agee.

3. -- Earnings quality may not be so great. Nike's bottom-line result for the quarter may not be as wonderful as it seems at first blush. The company's tax rate plunged to 16.3% from 24.4% a year ago as Nike saw an increase in the proportion of earnings generated from operations outside of the U.S. Second, Nike repurchased 24.3 million shares of its stock for approximately $1.5 billion, reducing the number of shares outstanding by about 1.7% and buoying earnings on a per-share basis.

4. -- Cautious earnings outlook during an Olympic Games year. Nike predicted earnings-per-share growth in the low teens for the fiscal year through May 2017, while Wall Street had anticipated gains of about 15%. The outlook is on the disappointing side, since Nike is headed into an Olympic Games year when demand for new products is often hot.

"Olympic years always have more innovation out of our pipeline than normal," CEO Mark Parker said on the call.

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