NIKE Tops Q2 Earnings, Reaffirms View; Future Orders Rise

Athletic apparel, footwear and accessories retailer, NIKE Inc. NKE posted second-quarter fiscal 2016 results, wherein its bottom line surpassed expectations for the fourteenth straight quarter. However, the top-line succumbed to a miss after delivering two consecutive beats.

NIKE’s second-quarter earnings per share of 90 cents surged nearly 22% year over year and outpaced the Zacks Consensus Estimate of 85 cents. The bottom-line growth was mainly aided by gross margin improvement, lower tax rate and reduced share count, partly offset by higher selling, general and administrative (SG&A) expenses.
 

Nike Inc. (NKE) EPS BNRI & Surprise Percent - Last 5 Quarters | FindTheCompany

Delving Deeper

Revenues of this sportswear retailer rose 4% to $7,686 million in the quarter. However, the figure fell short of the Zacks Consensus Estimate of $7,808 million due to the impact of currency headwinds. On a currency neutral basis, sales jumped 12%.

Revenues of the company’s NIKE Brand increased 13% on a currency neutral basis to $7,317 million. The segment registered double-digit growth across all regions and in about all core categories.

Moreover, NIKE Brand’s Direct-to-Consumer (“DTC”) revenues advanced 26% in the quarter, on the back of sustained online sales growth, a 13% rise in comparable-store sales and the addition of new stores.

However, revenues at the company’s Converse brand dropped 5% to $398 million on a currency neutral basis, attributable to a sales decline in European countries, somewhat compensated by strength noted in North America.

Nonetheless, NIKE’s global future orders, slated for delivery from Dec 2015 through Apr 2016, ascended 15% year over year. On a currency neutral basis, future orders soared 20%, reflecting rising demand for the company’s products. Further, this exceeded analysts’ expectations, driven by robust demand in China and North America.

Gross profit improved about 5% to $3,501 million, with gross margin increasing 50 basis points (bps) to 45.6%. The gross margin expansion was aided by increased average selling prices, partly offset by greater product input and adverse currency movements.

SG&A expenses escalated 5% to $2,560 million, mainly on account of higher operating overhead costs, whereas demand creation costs were flat year over year.

Balance Sheet

NIKE ended the quarter with cash and short-term investments of $6,116 million, long-term debt (excluding current maturities) of $2,067 million, and shareholders’ equity standing at $13,405 million.

Inventories during the quarter grew nearly 11% to $4,600 million.

Shareholder-Friendly Moves

During the second quarter, NIKE bought back 5.6 million shares for $652 million. This buyback was part of the four-year authorization worth $8 billion, approved by the company’s board in Sep 2012. As of quarter end, the company bought back 92 million shares under the program for nearly $7.2 billion.

Also, toward the end of the second quarter, NIKE announced a new share repurchase program worth $12 billion, alongside raising its dividend by 14% to 32 cents per share (on a pre-split basis) and a two-for-one stock split. The company anticipates its stock to begin trading at the split-adjusted rate on Dec 24, 2015.

Looking Forward

NIKE’s solid quarterly performance reflects its focus on adopting innovations to keep up with customer demand. In spite of foreign currency headwinds, the company’s results remain impressive, backed by its constant focus on exploiting growth opportunities and efficient risk management. Following an impressive first half, management remains optimistic about the rest of fiscal 2016.

Management reaffirmed its outlook, anticipating revenue growth in the mid-single-digit range for fiscal 2016, with gross margin expansion of about 50 bps.

SG&A expenses for fiscal 2016 are still expected to grow at a high single-digit rate. The company now envisions effective tax rate for fiscal 2016 to be nearly 20%, compared with 22% predicted earlier.

For the third quarter of fiscal 2016, the company anticipates revenues to grow at a high single to low-double-digit rate, as mid-teens growth on a currency neutral basis is likely to be weighed upon by currency fluctuations. However, gross margin is projected to decline 50 bps in the third quarter, owing to the company’s stringent efforts to clear excess inventory in North America and introduce innovative products.

Zacks Rank

NIKE currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Francesca's Holdings Corporation FRAN, with a Zacks Rank #1 (Strong Buy), and Caleres, Inc. CAL, with a Zacks Rank #2 (Buy). Another stock in the related textile-apparel space worth considering is Hanesbrands Inc. HBI, also carrying a Zacks Rank #2.

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