Nike (NKE) Up 1.8% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Nike (NKE). Shares have added about 1.8% 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 Q1 Earnings & Sales Estimates

NIKE swings back to better-than-expected top and bottom lines for first-quarter fiscal 2021 on robust growth in digital business despite soft retail traffic and wholesale revenues. Despite the uncertainty regarding the impacts of the coronavirus outbreak, the company updated its guidance for fiscal 2021 based on the robust first-quarter results.

It expects revenue growth in high-single digits to low-double digits in fiscal 2021. In the near term, it predicts the stronger-than-anticipated demand for its brands to be constrained by the supply decisions taken in the face of the pandemic. However, the company expects to witness significant revenue growth in the second half of the year versus the prior year.

For fiscal 2021, it expects gross margin to be flat year over year, including 40 basis points (bps) of foreign exchange headwinds. Gross margin outlook is based on the ability to return to normalized inventory levels by the end of the fiscal second quarter. In the second half of fiscal 2021, the company is likely to experience sequential improvement in full-price sales. However, higher markdown activity in factory stores is likely to continue to sustain conversion rates on lower traffic.

SG&A expenses in fiscal 2021 are expected to be flat compared with the prior year. This is likely to include $200 million of non-recurring execution costs out of $250 million costs incurred in the first half related to the simplification of the organizational structure.

Earnings & Revenues

In the reported quarter, the company’s earnings per share of 95 cents rose 10% from the year-ago quarter and beat the Zacks Consensus Estimate of 46 cents.

Revenues dipped 1% to $10,594 million but surpassed the Zacks Consensus Estimate of $9,173 million. On a currency-neutral basis, revenues were flat year over year. Although the top line benefited from robust digital sales, lower revenues at Wholesale business and NIKE-owned stores led to the decline. Notably, the company reopened nearly all of its stores in North America, EMEA and Greater China, while about 90% of its stores are operational across APLA. Despite the store reopenings, the company is witnessing year-over-year declines in retail traffic at physical stores, owing 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 first quarter, NIKE Direct sales increased 12% on a reported basis and 13% on a currency-neutral basis. Meanwhile, digital sales for the NIKE Brand were up 82% on a reported basis and 83% on a currency-neutral basis. Digital sales for the brand were mainly aided by double-digit growth across North America, Greater China, and APLA along with triple-digit growth in EMEA. Notably, digital sales for the brand contributed about 30% to total revenues in the reported quarter.

Operating Segments

Revenues for the NIKE Brand fell 1% to $10,018 million and were flat on a constant-dollar basis. 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 more than offset the aforementioned gains.

Within the NIKE Brand, revenues in North America fell 2% on a reported basis and 1% on a currency-neutral basis. NIKE digital reported 100% growth, reflecting triple-digit growth in full-price sales. This growth was driven by strong momentum in iconic styles like the Air Force 1 and Air Jordan 1 as well as women’s apparel, which recorded nearly 200% growth in the quarter. Further, the company witnessed strong demand on the NIKE App, up 150% in the fiscal first quarter on continued shift to mobile experiences. However, it notes that physical retail traffic remains below the prior-year levels.

In EMEA, the company’s revenues improved 5% on both reported and currency-neutral basis, driven by a strong recovery in Western Europe, offset by a slow recovery in Italy and Spain. Meanwhile, NIKE Direct grew more than 25% in EMEA, reflecting more than 100% digital growth led by demand for lifestyle products as the consumer focus on comfort continues. Moreover, the segment benefited from 11% currency-neutral growth in the Apparel category. Also, strong progress on Express Lane offense drove revenue growth and helped generate higher full-price realization in the quarter.

In Greater China, revenues increased 6% year over year (up 8% on a currency-neutral basis) in the fiscal first quarter. Currency-neutral revenues in the quarter benefited from strong double-digit revenue growth in Mainland China. Further, revenues for NIKE Direct rose 20%, with balanced growth of 30% in digital and double-digits at stores.

In APLA, NIKE witnessed an 18% revenue decline (down 12% 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 a recovery in Japan, Pacific and South Korea. Moreover, recovery in Latin America and certain countries in Southeast Asia continued at a slower pace.

Revenues at the Converse brand rose 1% to $563 million. On a currency-neutral basis, revenues of the segment improved 2% on the back of strong demand in Europe and strong global digital growth.

Costs & Margins

Gross profit fell 3% to $4,741 million, while gross margin contracted 90 basis points (bps) to 44.8%. The decline was mainly attributed to higher promotions to reduce excess inventory across the marketplace and higher supply-chain costs all mainly related to the impacts of the pandemic. This was partly offset by favorable product margins due to full-price selling and the reversal of some prior-quarter reserve accruals related to purchase order cancellation costs, owing to higher-than-anticipated consumer demand.

Selling and administrative expenses declined 11% to $2,975 million, driven by tight operating expense management as well as effective marketing spending as live sporting events slowly start to resume. Further, the company continues to invest in the digital business and transformation. As a percentage of sales, SG&A expenses declined 310 bps to 28.1%.

Notably, demand-creation expenses declined 33% year over year to $677 million due to lower marketing spend, offset by continued investments in digital business to support increased demand. Operating overhead expenses were down 1% to $2,298 million, reflecting lower travel and related expenses, partially offset by restructuring costs and continued investments in digital capabilities.

Balance Sheet & Shareholder-Friendly Moves

NIKE ended first-quarter fiscal 2021 with strong liquidity of $13.4 billion, which included cash and short-term investments of $9.5 billion, up $5.8 billion from the last year. These included proceeds from the $6-billion corporate bonds issued in March, offset by share repurchases and dividend payouts. Additionally, liquidity included committed credit facilities, which remain undrawn.

Moreover, it had long-term debt (excluding current maturities) of $9,408 million and shareholders’ equity of $9,224 million as of the end of the fiscal first quarter. As of Aug 31, 2020, inventories increased 15% year over year to $6,705 million, while it fell 9% sequentially. Sequential growth reflected its ability to manage excess inventory due to the coronavirus outbreak-led store closures and lower wholesale shipments globally in fourth-quarter fiscal 2020.

NIKE temporarily suspended share-repurchase activity 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 $384 million in the fiscal first quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 13.71% due to these changes.

VGM Scores

At this time, Nike has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Nike has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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