Post Earnings Coverage as Nike’s Earnings and Revenue Improve While Future Orders Decline

LONDON, UK / ACCESSWIRE / September 29, 2016 / Active Wall St. announces its post-earnings coverage on NIKE, Inc. (NYSE: NKE). The company released its fiscal first quarter 2017 results on September 27th, 2016. The sportswear maker kept its positive earnings surprise trend alive for the seventeenth consecutive quarter; however declining future orders raised concerns about the athletic retailer’s growth prospects. Register with us now for your free membership at: http://www.activewallst.com/register/.

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Earnings Reviewed

For the quarter ended on August 31st, 2016, Nike reported net income of $1.25 billion, or $0.73 per share, up from $1.18 billion, or $0.67 per share, a year earlier. The improvement in earnings was attributed to strong sales, reduction in total number of shares, operating overhead leverage and reduced tax rate, partially offset by a decline in gross margin and an increase in demand creation costs. Analysts had expected earnings of $0.56 per share. A resolution of a foreign tax credit matter with the Internal Revenue Service reduced Nike’s effective tax rate to 2.5%, compared to 18.4% in Q1 FY16.

For Q1 FY17 Nike generated revenue of $9.06 billion, up 8% on y-o-y basis, while it grew 10% on a currency neutral basis and exceeded the analyst expectation of revenue of $8.83 billion. The results were also slightly better than Nike’s guidance provided three months ago.

Segment Revenues

During Q1 FY17, revenues of the company’s NIKE Brand surged 10% on a currency neutral basis to $8.46 billion, driven by double-digit growth in Greater China, Western Europe, Emerging Markets, Central & Eastern Europe and Japan, including strong growth in Sportswear, Running and the Jordan Brand. Furthermore, NIKE brand’s Direct-to-Consumer (“DTC”) revenues improved 22% in Q1 FY17, driven by a 49% surge in online sales.

Furthermore, revenues from the company’s Converse brand rose 4% to $574 million in Q1 FY17 on a currency neutral basis, fueled by North American growth, partially offset by weakness in Europe and Asia/Pacific.

The Future Orders Conundrum

Futures orders for NIKE brand footwear and apparel (scheduled for delivery within the next six months) climbed 5% on y-o-y on reported and 7% on constant currency basis to $12.3 billion, compared with 9% growth for the same period a year ago. The company’s futures orders in the North American region, which comprises the lion’s share of its business increased by only 1% in Q1 FY17 compared with 14% growth in Q1 FY16.

Nike announced that based on its own evaluation and suggestions from shareholders, it will no longer provide a future order update as a stand-alone metric, with its earnings release. Nike will instead discuss the matter as part of its broader outlook in its conference call, and in its quarterly filings with the SEC.

The Future Order metric has been one of the most important gauge after revenue and net income for Nike’s investors to understand the health of its business. Under this program Nike allows retailers to purchase in advance at fixed prices, with a discount, in return Nike gets cash and an eye on sales in the near future. The program was created by Nike founder Phil Knight in the company’s early days to generate cash in advance. Nike stated that the metric longer provides the complete picture of company’s future business. Nike has significantly increased its own retail stores and the company also sells to consumers directly over the internet through its own website and app.

Costs & Margins

For Q1 FY17, Nike reported that gross profit improved about 3% to $4.12 billion; however gross margin shrank 200 basis points (bps) to 45.5%. The company attributed the decline in gross margin to several temporary or discrete items, including, foreign exchange impacts, and its exit from the Golf equipment business, a higher mix of off-price sales as compared to Q1 FY16, and a shift of expenses from Operating Overhead to Cost of Goods Sold.

Balance Sheet & Shareholder-Friendly Moves

As of August 31st, 2016 NIKE had cash and short-term investments of $4.79 billion, down 18% million compared to last year. The company’s long-term debt amounted to $1.99 billion, up 86% compared to $1.07 billion at the end of Q1 FY16. Inventories as of August 31, 2016, grew 11% to $4.90 million. Demand creation expense was $1.0 billion, up 25%, reflecting investments in key sports events.

During Q1 FY17, NIKE repurchased 19 million shares for $1.1 billion under its $12 billion program that was approved in November 2015 and extends for a four-year term. As of August 31, 2016, Nike had bought back a total of 39.0 million shares under this program for approximately $2.2 billion.

Outlook

Nike reiterated its FY17 revenue projections, and expects the same to grow at a high single-digit rate. However, the company now expects gross margin for FY17 to contract, against its previous forecast of expansion in a range of 30–50 bps.

For Q2 FY17, Nike anticipates revenue growth in the mid-single-digit range or little below its reported future order growth rate. Gross margin is forecasted to drop by approximately 125 bps, primarily due to the same factors that impacted gross margin in Q1 FY17.

Stock Performance

NIKE’s stock is trading down by 3.78% from its previous close of $55.34, closing Wednesday’s session at $53.25. At the end of the day, the stock saw a total volume of 32.66 million shares, which was above its 3-month average volume of 9.20 million shares. The company’s shares are trading a PE ratio of 24.68 and have a dividend yield of 1.20%.

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