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Nike Inc (NKE) Stock Surges on Q4 Earnings, But Don’t Lower Your Guard

NKE stock - Nike Inc (NKE) Stock Surges on Q4 Earnings, But Don’t Lower Your Guard

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It’s been a tough couple of years for Nike Inc (NYSE:NKE). Heading into the company’s fourth-quarter earnings report on Thursday, NKE stock had declined by more than 3% in the past 52 weeks, and had barely budged over the past two years.

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Competition from Under Armour Inc (NYSE:UAA) and in particular adidas AG (ADR) (OTCMKTS:ADDYY) has been a factor. So has the stronger dollar, which has hurt margins. Heading into its Q4 report, Nike needed a big showing to change the narrative.

It delivered.

Nike stock is up 6% in premarket trading as of this writing, after gaining as much as 7% in after-hours trading Thursday. Both sales and earnings came in ahead of consensus, and FY18 guidance was much better than expected.

It’s good news for Nike — but the quarter alone doesn’t necessarily change the longer-term outlook. Currency and competitive concerns persist. NKE stock isn’t all that cheap on an earnings basis. Q4 should help the sentiment toward Nike, but the company still needs to deliver a couple more quarters to get shares back to where they were.

Nike’s Big Fourth Quarter

On a headline basis, Nike’s fourth quarter looks like a huge beat. Revenue grew 5.3% as reported, against analyst expectations of a 4.7% increase. More impressively, EPS of 60 cents crushed the Street consensus of 50 cents, and rose 22% year-over-year.

The quarter wasn’t quite as good as those numbers suggest, particularly on the bottom line. Nike benefited from an extraordinarily low tax rate, under 14%, which helped profits, and to a lesser extent from repurchases of Nike stock. Pre-tax income actually rose just 6% year-over-year, implying flattish operating margins.

Gross margin — a long-running concern for Nike — compressed 180 basis points year-over-year. Most of that decline did come from currency, which negatively impacted gross margin by 140 bps, per the Q4 conference call. But product costs are increasing, adding modest pressure as well.

The reason why the tax rate was lower than expected, and that currency had such an impact, is that Nike’s growth was weighted to international markets. North America revenue was flat, and up just 1% even excluding currency. But constant-currency sales grew 12% in Western Europe, 18% in “emerging markets” and 16% in the key China market.

All told, this really was more of a good news/bad news quarter. But there was more good news than bad, hence the optimism toward NKE stock.

Nike Looking Forward

Another driver was FY18 guidance. Nike stock actually was up just 2% before the earnings call started. By the end of the call, NKE stock had gained 7%-plus in after-hours trading.

Analysts were expecting FY18 EPS of just $2.48 before the call — just a 3% increase YOY. That figure surely will rise. Guidance seems to suggest a modest profit increase from FY18’s $2.51, with share repurchases likely getting EPS to $2.60-plus.

Gross margin is expected to contract again, albeit at a lower rate. The tax rate is expected to rise. And Nike expects reported sales to rise in the “mid-single-digits,” roughly in line with analyst expectations for 6.2% growth.

But management seems to believe that recent concerns will ease by the second half of FY18 (roughly the first half of calendar year 2018). Currency effects on margins and sales should diminish, assuming current exchange rates hold. And with Nike expecting double-digit operating income growth excluding currency, NKE stock holders can see the light at the end of the tunnel.

Once currency finally stops impacting margins, and Nike’s profit growth in local currency is reflected in its dollar-based earnings, Nike could be on easy street.

Concerns Persist for NKE Stock

That said, Nike isn’t cheap. A roughly 22x multiple to FY18 EPS is one of the highest multiples in all of apparel at the moment. NKE might deserve that multiple, given its long-term success. But risks still remain.

The key driver of Nike stock in FY18, and beyond, will be how the company responds to e-commerce. Its DTC (direct to consumer) business grew at a healthy 18% clip in FY17, including 30% in digital. The company also confirmed and added detail about a rumored partnership with Amazon.com, Inc. (NASDAQ:AMZN), which appears to be a modest pilot selling Nike merchandise directly through the site.

If Nike can grow DTC, and keep the Amazon deal from pressuring pricing, margins should hold. If margins hold and currency normalizes, NKE can get back to double-digit EPS increases. That should be enough to expand both profits, and the earnings multiple.

In turn, that sets up NKE stock for a run to $60 and beyond.

But even the good news in Q4 shows that will be a difficult task. The North America market still generates 40%+ of revenue, and growth there is muted. The question for Nike is whether international and online sales can offset that weakness.

On that front, Q4 looks like a step in the right direction — but only one step.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/06/nike-inc-nke-stock-surges-on-q4-earnings-but-dont-lower-your-guard/.

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