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What’s Behind NIKE’s (NKE) Decline of 10.8% in Three Months?


The swoosh brand owner, NIKE Inc. NKE has been witnessing difficult times in the domestic market due to increased promotions and competition from online retailers. Though the company continues to be driven by its robust earnings trend, the aforementioned drawbacks have considerably weighed upon performance. This, along with a challenging retail environment and strained margins, has lowered future visibility, leading to a bleak outlook for fiscal 2018.

The cumulative effect of these factors is visible in the company’s stock performance in the last three months. Notably, the stock has declined 10.8%, underperforming the Consumer Discretionary sector’s growth of 2.5%.

Furthermore, the company’s Momentum Score of F indicates the chances of the stock picking up are bleak. That said, let’s get into the details of what is actually ailing this Zacks Rank #4 (Sell) stock.

Soft U.S. Sales – A Key Deterrent

While NIKE managed to deliver sales beat in first-quarter fiscal 2018, sales in its key North American market continues to suffer. The company posted a decline of 3% in sales for North America in first-quarter fiscal 2018. Its soft sales in North America are attributed to the lackluster product assortments, increased promotions due to growth of e-commerce and intensified competition.

Moreover, the company’s wholesale business in the region has been impacted due to increased focus on online sales. We believe the overall environment is likely to remain promotional in North America, hurting the results in this segment. These trends in North America make us cautious about the company’s overall performance.

Challenging Retail Environment & Bleak Outlook Weigh

Though this athletic apparel, footwear and accessories retailer anticipates continued strength in its international business and lower impact from foreign currency, it expects near-term results to be hurt by the challenging retail environment in the United States.

Consequently, it retained soft outlook for fiscal 2018. Reported revenues for fiscal 2018 are still anticipated to increase in the mid-single-digits. In second-quarter fiscal 2018, the company expects reported revenues in the low-single-digit range. The company expects decline in North America and in the Converse segment to be partly mitigated by strength in international business.

Estimates Trend Down

Given the soft outlook, the Zacks Consensus Estimates have been declining since the earnings results. Estimate for fiscal 2018 declined nearly 3.4% to $2.30 per share in the last 30 days, while for fiscal 2018 it has dipped 3.7% to $2.62 per share.

Nike, Inc. Price, Consensus and EPS Surprise

Nike, Inc. Price, Consensus and EPS Surprise | Nike, Inc. Quote

Strained Margins a Concern

NIKE has been witnessing strained margins for few quarters now. Apparently, its gross margin shriveled 180 basis points (bps) in the fiscal first quarter owing to foreign currency headwinds, as well as some impact from a higher mix of off-price sales. Further, operating overheads rose 8% in the quarter owing to realignment costs related to the workforce reduction plan announced in June, as well as continued investments in NIKE Direct.

Going forward, the company expects gross margin to contract about 50-100 bps in fiscal 2018. Reported SG&A for the fiscal is anticipated to increase in the mid-single digit range, including prudent operating overhead management, alongside investing in its Consumer Direct offence. In second-quarter fiscal 2018, gross margin decline is forecasted to be in line with the first quarter, owing to persistent currency headwinds. SG&A expense is anticipated to increase in the low-double digits range.

Where’s the Hope?

While the forward near-term outlook is not very appealing, we believe there lays an opportunity to grow in the company’s “triple-double” and Consumer Direct Offense strategies. Additionally, the company is continually looking for ways to increase global footprint, popularity and market share. Apart from acquiring new brands, the company has been focused on broadening territory through the growth of e-commerce and NIKE Direct business. We believe these efforts will go a long way in building the company’s long-term strength.

Bottom Line

Despite the smooth progress on the aforementioned strategies, we cannot ignore the near-term deterrents. Thus, we would like to see pronounced growth in its suffering North American business and an improvement in margins to be optimistic about the stock.

Done with NIKE? Here are Some Interesting Picks

Better-ranked stocks in the same industry include Deckers Outdoor Corp. DECK, Carter's, Inc. CRI and Wolverine World Wide, Inc. WWW, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Deckers, with long-term earnings per share growth rate of 9.8%, has surged 28.6% year to date.

Carter's has increased 11.1% in the last three months. The stock has a long-term growth rate of 8%.

Wolverine World Wide has a long-term EPS growth rate of 12.5%. Further, the stock has returned 32.3% year to date.

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