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Why Nike’s share price stepped up despite first earnings miss in years

Nike’s [NKE] share price saw marginal gains on Thursday 27 June after publishing mixed results for its Q4 and full-year fiscal 2019. Revenues for the sports apparel giant came in slightly above estimates for the quarter at $10.18bn instead of a predicted $10.16bn. 

However, earnings missed Wall Street expectations, coming at $0.62 for the quarter and $2.49 for the year, compared to estimates of $0.66 and $2.55, respectively. 

Nike has continued a disappointing run from Q3. Its share price is down almost 5% since the firm reported its Q3 2019 fiscal results on March 21. And while Nike shares have risen 14.7% year-to-date through Thursday’s close of $83.66, the stock is underperforming against the S&P 500’s 18.4% increase in 2019.

 

 

Macro headwinds cost Nike 

Despite underperformance due to a number of macro headwinds, Q4 was always likely to be a struggle for Nike. In May, 173 companies in the footwear industry wrote an open letter to US President Donald Trump, urging him to reconsider his tariffs on shoes made in China. “The proposed additional tariff of 25% on footwear would be catastrophic for our consumers, our companies, and the American economy as a whole,” the Footwear Distributors and Retailers of America wrote.

Yet, while Nike reportedly manufacturers around 25% of its shoes in China, it exports 10% of those to the US, which in turn comprises a small amount of overall North American revenue. Roughly 40% of Nike’s annual revenue is derived from other territories. 

Susquehanna analyst Sam Poser wrote in a note ahead of Q4 earnings: “Large, geographically diversified companies are best positioned to weather the storm from any additional tariffs imposed on Chinese imports.

“And while the majority of Nike’s sports equipment products were likely made in China last year, these goods comprised less than 5% of Nike’s total North American revenue in the 2018 fiscal year. Exposure to potential tariffs is limited,” Poser said.

“Large, geographically diversified companies are best positioned to weather the storm from any additional tariffs imposed on Chinese imports” - Susquehanna analyst, Sam Poser

The athletic giant also said greater SG&A costs and a higher tax rate meant its profits during the period fell 13% year-over-year to $989m. Margins have also been restricted internationally by the likes of competitors Adidas and Lululemon in the US and Canada, and Anta in China.

Foreign exchange headwinds – driven by a strong dollar due to global trade and geopolitical dynamics – weighed heavy on the company’s sales, too.

“Amid foreign exchange volatility, our double-digit currency-neutral revenue growth and expanding [return on invested capital] showcase Nike’s unrivalled ability to create extraordinary value for consumers and shareholders over the long term,” said Nike EVP and CFO Andy Campion.

Regionally in the North America market – where Nike had previously seen a decrease in growth amid rising competition from Adidas and retro labels like Champion – the company saw Q4 sales rise 7% from 2018 to $4.2bn. Full-year revenues in the region also improved by 7% to $15.9bn.

 

Market cap $134.91BN
PE ratio (TTM) 34.47
EPS (TTM) 2.49
Operating Margin (TTM) 12.20%

Nike share price vitals, Yahoo finance, 01/07/2019

 

Nike’s North American sales, which investors were watching after a disappointing performance in Q3, grew 7.5% year-over-year to $4.17bn in Q4. This was better than the 3% growth rate in the region during 2018 Q4. 

Meanwhile, China continued to be a massive boon for the company, contributing hugely to sales with revenue in the region growing 22% year-over-year to $1.7bn, or 16.7% of total Q4 revenue.

 

Investor sentiment cools on Nike

The stock is up 14.7% YTD, but share price growth has slowed recently. Short interest, which had been relatively even after a spike in May, began to rise again prior to the Q4 report. 

14.7%

Nike's share price increase YTD

On 26 June, short volume was 373,981 with a volume ratio of 6.41. These figures jumped to 1,230,472 and 10.76 respectively on the day of the earnings release. Nike’s P/E Ratio of 32.64, which is above the sector average, is consistent with the value seen in the days prior to the Q4 release.

“[Nike’s] underlying momentum remains exceptionally strong,” wrote Poser. “Digital prowess, a robust product pipeline and improving speed-to-market capabilities should continue to drive high-single-digit FX-neutral revenue growth and margin expansion for the foreseeable future.”

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