Nike (NKE) Up 0.2% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Nike (NKE). Shares have added about 0.2% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Nike due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

NIKE Beats Q2 Earnings & Revenue Estimates, Upbeat FY21 View

Nike posted better-than-expected second-quarter fiscal 2021 results, wherein both top and bottom lines improved year over year. Results gained from robust growth in the digital business despite soft retail traffic and wholesale revenues. The company also noted that its holiday season went well with record online sales during the Black Friday week. Moving on, it remains poised to gain from consumers’ increasing preference for digital, athletic wear, and health and wellness.

Further, management launched SNKRS live during the reported quarter, which led to a 100% sell-through of the Air Jordan 4 PSG in less than two minutes. The live streaming service, which is now available in North America and EMEA, is expected to be introduced in Japan soon. Apart from these, NIKE opened two Nike Live and six Nike Unite stores and intends to open 30 more in the second half of fiscal 2021.

Despite the uncertainty regarding the impacts of the coronavirus outbreak, the company updated its guidance for fiscal 2021 based on the impressive second-quarter results. NIKE is likely to witness growth on a sequential basis with gross margin remaining flat during the fiscal third quarter. For fiscal 2021, it anticipates gross margin to expand up to 50 basis points (bps) year over year, inclusive of currency headwinds to the tune of 35 bps. SG&A expenses are envisioned to grow in low-single digit due to a rise in variable costs. The fiscal guidance also includes roughly $315-million costs related to restructuring actions, out of which $220 million has already been incurred in the first half of fiscal 2021.

Q2 Highlights

In the reported quarter, the company’s earnings per share of 78 cents rose 11% from 70 cents reported the year-ago quarter and beat the Zacks Consensus Estimate of 63 cents.

Revenues of the Swoosh brand owner grew 9% to $11,243 million and surpassed the Zacks Consensus Estimate of $10,552 million. On a currency-neutral basis, revenues were up 7% year over year. Although the top line benefited from robust digital sales, lower revenues at the wholesale business and NIKE-owned stores acted as deterrents. Notably, the company reopened more than 90% of its stores with a few of them operating for limited hours. Despite the store reopening, the company is witnessing year-over-year declines in retail traffic in North America, EMEA and APLA due to the COVID-19 outbreak and related safety measures. This is, however, partly negated by increased conversion rates at stores.

Moreover, the top line benefited from robust digital sales across all regions. In the fiscal second quarter, NIKE Direct sales increased 32% on a reported basis and 30% on a currency-neutral basis. Meanwhile, digital sales for the NIKE Brand were up 84% on a reported basis and 80% on a currency-neutral basis. Digital sales for the brand were mainly aided by double-digit growth across EMEA, Greater China and APLA along with triple-digit growth in North America.

Operating Segments

Revenues for the NIKE Brand came in at $10,741 million, up 9% and 8% on a reported basis and constant-dollar basis, respectively. Results were primarily aided by double-digit growth in NIKE Direct and growth in Sportswear and the Jordan Brand. However, declines in the wholesale business to the tune of mid-single digits somewhat offset the aforementioned gains.

Within the NIKE Brand, revenues in North America rose 1% each on a reported basis and currency-neutral basis. Although wholesale revenues and traffic remained drab, strength in NIKE digital contributed to quarterly growth. Notably, NIKE digital accounted for roughly 25% of sales in North America in the quarter under review.

In EMEA, the company’s revenues improved 17% on a reported basis and 12% on a currency-neutral basis. Despite the resurgence of COVID-19 cases that led to restrictions in November, the region witnessed robust weekly sales growth and a rise in full-price realization. Moreover, NIKE Direct grew 25% at constant-dollar basis and wholesale rose 6% on a reported basis on the back of double-digit growth in JD Sports and Zalando. Also, NIKE digital surged almost 100% as Cyber Week recorded sales growth and customer engagement. Apart from these, strong progress on Express Lane offense drove revenues to the tune of more than 30% year over year.

In Greater China, revenues increased 24% year over year (up 19% on a currency-neutral basis) in the fiscal second quarter. Sales in this region gained from solid performance in Singles’ Day with more than 0.5 billion in online demand. Keeping in these lines, the company introduced robot delivery and green packaging to attract more customers. Also, all orders were shipped within 48 hours and delivered the next day or the same day.

In APLA, NIKE revenues remained flat year over year (up 5% on a currency-neutral basis) due to varied COVID-19 impacts across countries in the region. Digital sales in the region improved more than 90%, led by an expanded base stemming from strategic partnerships in Mexico, Japan and Southeast Asia as well as the launch of Nike.com in Mexico. Moreover, management in collaboration with Grupo SBF successfully concluded the transition of its business in Brazil. Also, both companies have announced the termination of the sale of NIKE’s Argentina, Chile and Uruguay businesses.  

Revenues at the Converse brand edged down 1% to $476 million. On a currency-neutral basis, revenues of the segment fell 4% due to weakness in Europe and North America stemming from tighter supply and strategic distribution shifts, which more than offset strong demand in Asia and solid global digital growth.

Costs & Margins

Gross profit advanced 7% year over year to $4,847 million, while gross margin contracted 90 basis points (bps) to 43.1%. The decline was mainly attributed to higher promotions to reduce excess inventory across the marketplace and increased restructuring costs, all mostly related to the impacts of the pandemic. This was partly offset by favorable product margins.

Selling and administrative expenses declined 2% to $3,267 million, driven by tight operating expense management as well as effective marketing spending on brand and sports events. Further, the company continues to invest in digital business and transformation. As a percentage of sales, SG&A expenses contracted 310 bps to 29.1%.

Notably, demand-creation expenses declined 17% year over year to $729 million due to lower marketing spend, offset by continued investments in the digital business to support increased demand. Operating overhead expenses were up 4% to $2,538 million, reflecting higher restructuring costs and continued investments in digital capabilities, partially offset by restrained capital spending.

Balance Sheet & Shareholder-Friendly Moves

NIKE ended second-quarter fiscal 2021 with strong liquidity of $15.8 billion, which included cash and short-term investments of $11.8 billion, up $8.3 billion from the last year. These included proceeds from the corporate bonds issued in March and strong free cash flow. Additionally, liquidity included committed credit facilities, which remain undrawn.

Moreover, it had a long-term debt (excluding current maturities) of $9,410 million and shareholders’ equity of $10,640 million as of the end of the fiscal second quarter. As of Nov 30, 2020, inventories fell 2% year over year to $6,090 million.

NIKE temporarily suspended share-repurchase activities in March to preserve liquidity amid the pandemic. Prior to the suspension, it repurchased 45.2 million shares for nearly $4 billion. Consequently, it had a share repurchasing capacity of $11 billion remaining under the current program. However, the company paid out dividends worth $385 million in the fiscal second quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

At this time, Nike has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Nike has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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