Nike Stumbles on Europe and China

by Dan Burrows | June 29, 2012 9:56 am

Athletic footwear and apparel giant Nike (NYSE:NKE[1]) blew its fiscal fourth-quarter earnings[2] and outlook late Thursday, and that was the last thing the stumbling stock needed. After cratering early in Friday’s session, Nike’s stock has now lost nearly 25% since early May — and it’s hard to see when it will catch a bid.

Higher costs for labor and marketing pinched margins, while the global economic slowdown hurt demand, especially in Europe, where Nike does about 25% of its business.

The result was a drop in fourth-quarter profit for the first time in three years — and Nike missing Wall Street’s forecast by a mile.

Earnings fell 8% to $549 million, or $1.17 a share — a full 20 cents short of analysts’ average estimate, according to FactSet. Revenue increased 12% to $6.47 billion, but that also missed Street estimates, which stood at $6.51 billion.

Future orders for the Nike brand were another missed expectation, while gross margins fell on higher costs. Among other expenses, Nike is pumping marketing dollars into promotions for the London Olympics and European soccer events.

Meanwhile, guidance for everything from revenue to gross margin to operating expense to earnings freaked out the Street.

Oh, and the company said it has a glut of inventory in China, where it expects sales to slowdown.

This is not what Nike shareholders are used to. The company usually exceeds pretty much any view analysts throw at it. Before Thursday’s report, Nike had beaten bottom- and top-line estimates for four quarters in a row. Indeed, the company hasn’t punted Street estimates with any regularity since the depths of the Great Recession, and that’s clearly very much in the market’s mind as it values shares for the future.

Nike’s global footprint has been a worry ever since much of Europe slipped into recession or starting showing zero growth. A stock that traded north of $110 two months ago is now struggling to stay above $85.

More worrisome, gross margin has missed Nike’s own forecast for three consecutive quarters, even as sales have climbed. That means the company isn’t getting the prices that it wants. A stronger dollar isn’t helping matters, either.

“With muted earnings growth in the coming quarters and a heightened risk profile, in our view, we struggle to see a catalyst for shares until visibility to mid-teens earnings growth is fully restored,” writes Andrew Burns, an analyst with D.A. Davidson, who downgraded Nike to neutral after the earnings report.

That sounds about right. The global market is miserable for consumers these days, especially when it comes to selling premium-priced sneakers. Bloated inventory levels, a strong dollar and a stagnant European market mean investors should call a time out on this trade.

Dan Burrows doesn’t hold any of the securities mentioned here.

Endnotes:
  1. NKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NKE
  2. blew its fiscal fourth-quarter earnings: http://investorplace.com/2012/06/nike-margins-and-profit-fall-shares-plunge/

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