Shares of athletic footwear titan NIKE (NKE – Free NIKE Stock Report) were up sharply following the company's release of favorable November-period financials (fiscal year ends May 31st). In that three-month window, sales and earnings both topped consensus expectations. Too, management sounded a positive tone for the future, stating that it sees momentum developing into next year, meaning calendar 2019.
On the top line, the revenue reading clocked in at $9.37 billion for the November interim, a 10% year-over-year advance. This figure bested our call of $9.16 billion and beat some figures on Wall Street by a wider margin, as a more defensive stance was taken given some recent global trepidation. NIKE leadership stated that revenue was up in nearly every category, with footwear and apparel carrying the growth torch on the worldwide stage. Improvements in the digital business were also evident. Separately, there were serious concerns that a controversial ad campaign featuring former NFL quarterback Colin Kaepernick might hurt sales some, but no such signs arose in the quarter. Moreover, trade friction between the United States and China, where NIKE sources a substantial amount of its goods, was not impactful.
On the profit line, NIKE's fiscal second-quarter net income rose 10% year over year, to $847 million, or $0.52 a share. The share-net figure was $0.07 greater than what we were looking for (our number was in line with the Wall Street consensus), and compared favorably with the $0.46 amount put up in the same quarter of fiscal 2018. Profits were aided by higher average prices, which, in turn, boosted gross margins. It was also intimated that foreign exchange headwinds intensified in recent months.
As is always the case, the vital North American market requires a watchful eye for investors. This area is NIKE's biggest market, and some troubles last year had many investors heading for the exits. In the November quarter, sales rose 9% year over year, to $3.78 billion. The Jordan brand, in particular, saw its sales return to growth mode, as fresh designs and collaborations drove results. Elsewhere around the globe, receipts climbed 8% in Europe, the Middle East and Africa, while Asia/Pacific sales increased a modest 2%. China led the way and posted robust growth of 26% on a year-over-year basis. In that country, the growing popularity of the National Basketball Association, and NIKE's relationship with a number of its stars, is paying off in a big way.
For the whole of fiscal 2019, we are adjusting both our sales and earnings estimates higher, as there is six months of actual data now in the books. We are adding about $580 million (including the $210 million beat in the quarter just reported) to our top-line call, which now stands at $39.75 billion. Such sales levels would then likely equate to share net of $2.75, a dime higher than our previous figure.
From an investment perspective, we like NKE stock in the near term, but think there are better long-term options in the footwear space. Capital appreciation projections out to 2021-2023 will not bowl anyone over, and the dividend serves more as an enhancer than a true income play. Financials are rock solid, however, and this selection receives our Highest (1) score for Safety. Thus, during a flight to quality, which may well accelerate if the recent market tumult perseveres, NIKE is not the worst place to park funds.
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
