Shares of Dow-30 member NIKE (NKE – Free NIKE Stock Report), the ubiquitous footwear retailer, were down by more than 4% in early morning trading Friday. The decline can be directly tied to the company's release of its February-period (fiscal years end May 31st) financials. Sales and earnings both topped our and the Street's estimates, though some underlying growth metrics from quarter to quarter and year over year gave investors reason to pause. In turn, with the stock up more than 35% in price over the past 12 months, and with the quotation touching on 52-week highs, it is likely that some accounts chose to take profits.
Revenues for the three-month interim clocked in at $9.61 billion, up 7% on a year-over-year basis from the $8.98 billion posted last year, and about $40 million ahead of our call, which was slightly above the Wall Street consensus. At the vital North American market, which represents roughly 40% of sales and is watched closely by investors as a gauge of the company's strength, sales rose 7%, to $3.81 billion. Here, we were looking for a reading of about $3.87 billion. It is also worth noting that the aforementioned 7% growth figure was a slowdown from the 9% put up in the previous quarter. Some of the trepidation being shown in early morning trading can almost certainly be tied to concerns with this metric. In that vein, sales in Greater China powered 19% higher, to $1.59 billion, and were above the consensus call of $1.54 billion. However, the fiscal second-quarter growth figure was 26%, so some sequential slippage was evident. And with worries that the second-largest economy may be poised for a breather growing louder, we begin to see why some investors may have chosen to cycle out of NKE. Changing lanes, footwear sales, which account for 64% of the total companywide receipts, jumped 9% here in North America, and all parties agree that NIKE is doing well in fending off the wave of competition coming from Adidas and, to a lesser extent lately, Under Armour (UA).
The company registered quarterly earnings of $0.68 a share, a penny above our expectation and on par with the year-earlier figure (adjusted for tax reform). The Street was looking for a showing of roughly a nickel lower, or $0.63 a share. Moreover, the reported gross margin increased by 1.3%, to 45.1%. The margin expansion surfaced as the result of higher average selling prices, favorable changes in currency exchange rates, and gains in the digitally-focused NIKE Direct business. The direct-to-consumer approach should be a catalyst going forward, even as the company strengthens its wholesale partnership with the likes of Foot Locker (FL), Nordstrom (JWA), and Dick's Sporting Goods (DKS).
For the balance of fiscal 2019, we are leaving our top- and bottom-line calls unchanged, for now, though we do realize that there is a possibility of slowing sequential growth. We continue to look for revenues of $39.22 billion, which would then translate into share net of $2.65, an annual advance of more than 10% from the $2.40 that is on the books for fiscal 2018.
So is NKE stock worth an investment at this point in time? The answer to that inquiry depends on the perspective taken. We think this blue chip has room to run in the near term and that the aforementioned shortcomings from this quarterly report may well be retraced in the coming weeks. However, those looking through a longer-term lens have likely missed the boat. Capital appreciation potential out to 2022-2024 is subpar, and the dividend yield is only about half the Value Line median.
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
