Shares of Nike (NKE) dropped in morning trading after the athletic apparel and footwear maker reported weaker than expected sales in North America during its fiscal third quarter.
EARNINGS: Nike reported earnings of 68c per share for Q3, 3c above consensus estimates of 65c. Revenue for the quarter of $9.6B was in line with forecasts and the company's gross margin increased 130 basis points to 45.1%, driven by higher average selling prices, favorable changes in foreign currency exchange rates and growth in NIKE Direct, partially offset by higher product costs. Revenues for the NIKE Brand were $9.1B, up 12%, while revenues for Converse were $463M, down 2% on a currency-neutral basis.
In North America, sales were up 7% to $3.81B, excluding currency changes, softer than analysts had expected. Europe, the Middle East and Africa, or EMEA, sales were up 12%, excluding currency changes, to $2.44B, Nike said. In China, revenue was up 24%, and up 14% in Asia Pacific and Latin America.
"Our business momentum is being accelerated by our ability to scale innovation at a faster pace and expand new digital consumer experiences around the world," Nike Chief Executive Officer Mark Parker said in a statement. On the company's earnings conference call, management also called out "continued momentum in China," a geography its said it's still "bullish" about despite uncertainty about tariffs. "We have great momentum in China, but we are still far from realizing the long-term opportunity in this market," Chief Financial Officer Andy Campion added.
"The innovation pipeline is full," Parker said, adding that "It gives us great confidence that we'll continue to win with the consumers for years to come."
GUIDANCE: Looking to the fourth quarter, Nike forecast revenue growth in the high single digit range, compared with analysts' estimates of $10.38B, with gross margin expansion of 75 basis points. For fiscal 2020, Nike forecast revenue growth in the high single digit range, compared to analysts' estimates of $42.4B.
"The women's business is over-indexing our men's growth," Parker said. "And we see... tremendous opportunity moving forward." He added that "We've had [a] real strong response to the Nike yoga collection."
WHAT'S NOTABLE: Zion Williamson, a Duke University freshman center who plays for the Duke Blue Devils, suffered a mild sprain to his right knee after his sneaker split in half 36 seconds into a game between Duke and North Carolina in February. Williamson was wearing the Nike PG 2.5 basketball shoe when he was injured, according to ESPN. In a statement at the time, Nike said "The quality and performance of our products are of utmost importance. While this is an isolated occurrence, we are working to identify the issue." Nike did not mention Williamson or the incident during its earnings conference call.
Nike did, however, comment on its "Consumer Direct Offense," saying on its conference call that it is still in the early stages of executing the plan "with much more opportunity ahead of us." CFO Campion added that "We will continue to focus our investments on the digital transformation of Nike and in the areas of our business where we see the greatest potential to grow and create value for both consumers and shareholders."
ANALYST COMMENTARY: Though Nike's Q4 outlook is shy of Street estimates, JPMorgan analyst Matt Boss said in a research note that Nike has been "historically conservative" with its forecast. He said Nike selling more directly to consumers, and at full price, should continue to boost gross margins and help the company exceed its own outlook. Separately, Nomura Instinet analyst Simeon Siegel raised his price target on Nike shares to $91 from $85, telling investors that "in this environment, Nike is showing its stripes, standing as the clear outlier to the recurring revenue ceiling that dominates all brands." Piper Jaffray analyst Erinn Murphy also boosted her price target for the stock to $93 from $92, saying Nike's earnings call highlighted strong evidence of market share and category momentum in addition to opportunity for improving returns as digital contribution accelerates. She believes Nike's investments are paying off in sales and gross margin but are "keeping a lid" on earnings.
Barclays analyst Matthew McClintock says Nike's long-term growth story "remains highly intact" following last night's fiscal Q3 results. While currency headwinds continue to depress reported results, the core underlying growth rate continues to remain "highly impressive," he contended. Credit Suisse analyst Michael Binetti said Nike delivered a "high quality" beat for the third quarter, and while there were "more puts and takes than expected," North America direct to consumer and wholesale both grew mid single digits in Q3, and believes DTC should accelerate in fiscal 2020. Meanwhile, Morgan Stanley analyst Lauren Cassel thinks the company's initial FY20 guidance should be viewed as conservative. She believes Nike's direct-to-consumer transformation remains in its early innings and views it as one of the few consumer discretionary companies benefiting from the shift to e-commerce.
Jefferies analyst Randal Konik said he prefers shares of Under Armour (UAA, UA) given the "misplaced overly negative sentiment." Konik also views Foot Locker (FL) shares as the best way to play a strengthening Nike business as Nike accounts for 70% of the company's product.
PRICE ACTION: In morning trading, shares of Nike are down 4.5% to $84.08. Meanwhile, Foot Locker shares are also down about 2% to $58.79.
Keywords: earnings report, quarterly earnings, analyst, commentary, price target, athletic apparel, footwear