While some were dismayed that the North American marketplace recovery wasn’t more apparent, Wall Street was generally pleased with Nike’s better-than-expected second-quarter results.
The better-than-expected quarter, which ended November 30, was helped by strong double-digit growth overseas, robust direct-to-consumer growth (e-commerce up 29 percent, comp sales improving 6 percent) as well as a slightly better-than-expected gross margin and a lower- than-estimated tax rate.
On the downside, sales in the North America region declined 4.5 percent, worsening from the 3 percent drop seen in its fiscal first quarter. Nike officials also warned in the fiscal third-quarter, companywide growth would be at or below Q2 reported growth, gross margin would contract 125 to 175 basis points and SG&A expenses would expand double-digits before healthier results arrive in the fourth quarter.
With Nike generally maintaining its guidance for the year, estimates for the third quarter were reduced by around 10 cents a share and the fourth quarter increased slightly.
Analysts were generally hopeful that the North American marketplace would return to growth in the fiscal fourth quarter when a large number launches across categories takes place and then build on that gain during the following year.
At Stifel, Jim Duffy, who has a “Buy” rating on Nike with a target price of $74, said in a note that a promised return to high-single-digit growth in fiscal 2019 “becomes more credible” with signs of improvement in North America in combination with accelerating trends in DTC and continued strength in International.
Wrote Duffy, “Early evidence of a shift towards more performance inspired styles, building momentum in DTC, and still strong momentum in Europe and China suggests the HSD revenue growth objective is attainable.”
At the same time, Nike officials’ call for “significant sequential improvement” in gross margins for the coming fiscal fourth quarter represented a “further reason for optimism.” The margin gains are expected to be supported by improving inventory positions, innovation that supports more full-price selling and the anniversary of foreign exchange headwinds. Duffy believes current consensus estimates for fiscal 2019 remain too conservative.
Added Duffy, “With evidence of firming fundamentals and upside capacity to consensus estimates, we continue to view NKE shares as a solid core holding for growth investors.”
Stifel maintained its EPS target of $2.37 for the current fiscal year but raised it to $2.92 for fiscal 2019 from $2.87 previously, reflecting a lower corporate tax rate.
Less bullish is Susquehanna Financial Group’s Sam Poser, who has a “Neutral” rating on the stock with a price target of $57. In a note, he wrote that while a lower tax rate, better gross margin, SG&A improvement, and strong international growth all supported the upside results, “challenges in the NA wholesale channel appear acute.”
On the upside, Poser applauds Nike’s efforts to re-balance inventory to reflect supply/demand in North America and create a “pull” market for the brand. These moves include reducing distribution on Jordan retro offerings, de-emphasizing undifferentiated wholesale retail accounts, stepping up the pace and impact of innovation and leveraging digital investments such as Nike +. He wrote, “Good decisions are being made to preserve the health of the Nike brand.”
But he said re-establishing Nike’s demand-pull model will require pulling back supply in large platforms such as Jordan Retro and getting broad acceptance of the new platforms, such as Shox, Air Max 270, & Epic React. Wrote Poser, “Controlling market supply is necessary, but it is unclear if the aforementioned new platforms will perform at a high enough level to jumpstart MSD (mid-single-digit) revenue growth in NA.”
Susquehanna lowered its FY18 EPS from $2.30 to $2.21 due to the continued elevated promotional environment and sluggish sales in North America. Its FY19 EPS was maintained at $2.63.
Said Poser, “We continue to be uncertain on the timing and path to a return to healthy growth in NA.”
At DA Davidson, Andrew Burns, who has a “buy” rating with a target price of $78, said that while the third-quarter “trends will remain difficult,” Nike appears to be moving past recent headwinds and is headed for a top-line recovery in the region.
He added in a note, “Additionally, the wholesale environment has improved in recent weeks and competitive headwinds now appear manageable. We expect a North America recovery, combined with international momentum and more favorable FX to drive revenue and earnings growth acceleration in FY19.”
At the same time, Nike’s international and DTC strength “highlighted positive brand momentum” and that momentum should continue with investments in digital investments driving Nike+ membership growth.
DA Davidson kept its estimate for the current year at $2.29, although its third-quarter guidance was sharply lowered and its Q4 raised. The firm’s estimate for fiscal 2019 was adjusted down slightly to $2.70 from $2.71. DA Davidson’s newly issued estimate for fiscal 2020 is $3.11.
DA Davidson raised its price target on Nike to $78 from $68 previously as it rolled its valuation methodology to FY20 numbers. Wrote Burns, “In our view, NKE deserves a premium valuation and the shares can appreciate with earnings growth.”
At Cowen, John Kernan, who has a “Market Perform” rating with a price target of $64, believes Nike’s shares appear “fairly valued” following the recent pick up in the stock’s price.
He wrote that if momentum accelerates globally, as Nike officials anticipate, Nike’s growth should reaccelerate to mid-teens EPS growth in fiscal 2019, in line with targets as the product cycle takes hold and FX headwinds abate. The drivers of the 2019 momentum include low-double digit reported International revenue growth and only modest North America growth at a low-single digit rate.
Cowen’s FY19 estimates were reduced slightly to $2.61 from $2.64 versus consensus of $2.67, reflecting 15 percent EPS growth year-over-year and the investment firm’s forecast of 6 percent reported revenue growth
Kernan still praised Nike for its leading position in athletic apparel across gender, ages and income levels and its commitment to bringing innovations such as Flyknit, Air and React to the marketplace and its success in establishing digital connections with Nike+ and its apps.
Kernan added, “We believe direct to consumer expansion and NKE’s ‘manufacturing revolution’ could create a multiyear inflection in gross margin past prior peaks to reach $3.60 in EPS potential through FY22E.”
Shares of Nike closed Tuesday at $63.65, off 36 cents, on the day. The stock’s 52-week range is between $50.35 and $65.19.
Photo courtesy Nike