The fiscal Q3 earnings report from Nike Inc (NYSE:NKE) was good, but it might not have been that good. Nike stock gapped up around 3% on Friday. But NKE stock only regained the ground it lost on Thursday, in a down market, and still sits modestly below all-time highs reached in February.
That seems about right. Nike crushed consensus earnings estimates but in large part due to a lower adjusted tax rate. The company’s outlook in North America was better than expected, but overall growth remains rather muted.
Nike stock has been a rather mediocre performer of late; it trades only barely above late 2015 highs. Q3 results suggest some improvement but perhaps not all that much excitement, at least not yet.
Nike Stock Rises After Earnings
The big news from Nike’s Q3 was what looked like a monster beat. Analyst consensus suggested EPS of $0.53. Backing out charges related to U.S. corporate tax reform, however, Nike EPS came in at $0.68.
That seems like good news. But from an earnings standpoint, the quarter actually wasn’t that impressive. What appears to have been a sharply lower tax rate (again backing out one-time charges) drove much of the “beat.” The $0.68 print was equivalent to the year-before quarter. But pre-tax income actually declined 12% year-over-year.
News on the top line was similarly mixed. Revenue rose 6.6%, better than Street estimates of a ~5% increase. But more than half of that growth came from currency help, and revenue in North America declined 6% on a constant-currency basis.
As far as Q3 goes, it wasn’t a bad quarter. But it hardly answered the questions surrounding NKE stock heading into the quarter, questions James Brumley detailed this week.
Where the news gets better, though, is in the outlook. On the Q3 conference call, CEO Mark Parker called the bottom in North America, citing a “reversal of trend” heading into Q4.
A long-running currency headwind is abating and should present a modest tailwind in fiscal 2019. In part due to that help, gross margin is expected to increase next year. And early guidance for mid- to high-single-digit revenue growth in fiscal 2019 appears favorable against Street estimates of 7.1%.
The takeaway from bulls from the quarter will be that Nike finally will get back to where it was. So why didn’t Nike stock rise more in trading on Friday?
NKE Stock Still Has Questions
Pricing is up worldwide and up “slightly” in North America. A normalization at the retail level after the bankruptcies of retailers like The Sports Authority and Sports Chalet should help.
And Nike’s direct-to-consumer (DTC) efforts are making progress, with double-digit growth on Nike.com. (As an aside, both Foot Locker, Inc. (NYSE:FL) and Finish Line Inc (NASDAQ:FINL) are up on the Nike report. Given the DTC strength, that seems far too optimistic.)
There’s the possibility that Nike could face impact from a potential trade war. And there’s also the valuation question.
Nike stock still trades at almost 25x FY19 analyst estimates (though those estimates may tick up coming out of Q3). That’s a multiple that requires consistent, double-digit earnings growth to drive material upside. And that’s growth that Nike hasn’t proven, of late, that it can generate.
Nike earnings, and particularly the near-term outlook, are a step in the right direction. But at 25x EPS, it will take a few more quarters to prove the company is back on the right track.
As of this writing, Vince Martin has no positions in any securities mentioned.