Shares of footwear and apparel maker NIKE (NKE – Free NIKE Stock Report) are down modestly pre-market action following the company's announcement of fiscal first-quarter (ended August 31st) results that were in line with both our and Wall Street's expectations. It appears the investment community, at least initially, got caught up on the fact that expenses were noticeably higher. More specifically, selling and administrative costs were up 7%, to $3.1 billion. Demand creation costs jumped 13%, to $964 million, driven by sports marketing investments and brand campaigns. That being said, NIKE knows how to spend money to make money and has a long history of doing just that. Therefore, we think there is some nit picking going on, particularly by those that had bid up NKE stock to its recent all-time highs. Thus, some profit taking is likely at play here.
Revenues for the three-month period came in at $9.95 billion, ahead of our $9.91 billion expectation and the previous-year figure of $9.07 billion. Receipts at the vital North American division rose 6%, the second-consecutive quarterly increase after a period of poor comparisons. Total apparel sales surged 11%, footwear was 10% higher, and digital revenues posted a 36% incline. With the company pouring money into new technologies, including a couple of apps, it was not surprising to see that the digital platform was the fastest-growing channel in each and every geography. Looking overseas, sales in Greater China rose 20%; Asia/Pacific and Latin America displayed a 14% gain; and Europe, Middle East & Africa registered 9% growth.
From an earnings perspective, share net came in at $0.67, two cents above the consensus and up handsomely from the $0.57 figure posted in previous-year period. We touched on the expense concerns above, but that did hold back share-net growth over the first 13 weeks of fiscal 2019. Regardless, profitability is running a hair ahead of schedule thus far, and management was quick to reiterate its earlier earnings guidance for the full fiscal year. On that note, we will be maintaining our $2.75-a-share call, which would represent a year-over-year advance of around 15% and a record level for the company.
The earnings report comes on the heels of NIKE's newest ad campaign featuring controversial former NFL quarterback Colin Kaepernick. Choosing this athlete as a spokesperson led to a wave of social media backlash and an initial dip in the stock's quotation. However, the shares were rising steadily heading into the quarterly release, as some on Wall Street think this move will ultimately boost sales, especially to younger shoppers that NIKE covets in its ongoing battle to take market share away from Adidas and Under Armour (UA). Our view is that the jury is still out on this decision. Commercials began airing after the quarter closed and we will not have a true read on its actual effect until the company's next quarterly report. One thing we can say for sure, the rollout of this campaign pushed the big story that was surrounding NIKE in the summer months out of the headlines: former president Trevor Edwards, who many expected to be the next CEO, was forced to leave the company amid complaints of rampant sexual harassment and discrimination.
That said, the leadership change aside, we are far more concerned with the direct-to-consumer platform and the courting of female shoppers. With a rash of bankruptcies decreasing the number of sporting goods retailers, NIKE is pouring money into stores and also pushing into women's athletic wear, creating a fresh rival in lululemon (lulu). Also, we are a fan of the company's new scarcity tactics. This uses tight inventory management to make some items rare and thus encourage shoppers to purchase faster or risk being shut out. This notion hearkens back to the heyday of the Air Jordans, which brought both NIKE and Michael Jordan into the mainstream.
Taking a look at the stock, is NKE worth a commitment at these price points? We would have to say no. The lofty quotation has left appreciation potential out to 2021-2023 at subpar levels, and the dividend yield is only about half of the Value Line median. Subscribers are advised to take a pass for now and await a better entry point to purchase this retail blue chip.
About The Company: NIKE, Inc. designs, develops, and markets footwear, apparel, equipment, accessories, and services. It sells products to retail accounts, through NIKE-owned retail stores and the Internet, and through a mix of independent distributors and licensees in approximately 190 countries. Subsidiary brands include Converse casual sneakers and Hurley lifestyle apparel and accessories.
- Erik M. Manning
