Nike Impresses Traders But Be Patient Before Making a Move
I'm less than impressed with the athletic brand's progress.
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Is the curse of the John Donohoe era at Nike (NKE) finally over?
For the first time since Donohue took over at the athletic footwear/apparel/equipment giant in 2020, there appears to be something positive going on at Nike. Could it be optimism? It's been so long.
Current CEO and longtime company executive Elliot Hill came out of retirement to try to turn the beleaguered firm around about a year ago. The results of his efforts are at last becoming visible.
For the firm's fiscal first quarter, which ended August 31, Nike posted a GAAP EPS of $0.49 on revenue of $11.72 billion. The top-line print was good enough for year-over-year growth of 0.9%. Doesn't look like a lot? Hey, it is growth, which was a surprise as a sixth consecutive quarter of annual contraction had been projected. That bottom-line number absolutely crushed that where for something more than 20 cents per share lower.
Perhaps the two key takeaways from the quarter were the resurrection of the wholesale business and the better-than-expected gross margin (despite year-over-year decay). Wholesale revenues were up 7% to $6.8 billion as the firm re-engaged with partners such as Dick's Sporting Goods (DKS) . Long-time Nike distribution partner Foot Locker is now a subsidiary of Dick's Sporting Goods.
The CEO
Hill commented in the press release:
“This quarter NIKE drove progress through our 'Win Now' actions in our priority areas of North America, Wholesale, and Running. While we're getting wins under our belt, we still have work ahead to get all sports, geographies, and channels on a similar path as we manage a dynamic operating environment. I'm confident that we have the right focus in Win Now and that our new alignment in the Sport Offense will be the key to maximizing NIKE, Inc.’s complete portfolio over the long-term.”
However...
The CFO was cautious.
CFO Matthew Friend said, “I’m encouraged by the momentum we generated in the quarter, but progress will not be linear as dimensions of our business recover on different timelines. While we navigate several external headwinds, our teams are focused on executing against what we can control.”
Operations
For the period, sales landed up 0.9% at $11.722 billion. The cost of those sales increased 7% to $6.777 billion. This left a gross profit of $4.943 billion (-6%) as gross margin dropped from 45.4% a year ago to 42.2%.
Total selling and administrative expenses dropped 1% to $4.016 billion. Within that number overhead expenses were largely flat while demand creation expenses were down 3%. After accounting for interest, and other income and expenses, income before taxes were down 29%. As the firm's effective tax rate increased from 19.6% to 21.1%, GAAP net income printed at $727 million down 31% from the year-ago comp of $1.051 billion. This works out to a fully diluted EPS of $0.49, down from the year-ago comp of $0.70. If you just shrugged your shoulders, you're not wrong. Corporate execution is nowhere near the same place in the firm's recovery as sales in general seem to be.
Revenue Performance
Brand
- Nike generated sales of $11.362 billion, 2% year over year, or flat in constant currency
- Converse generated sales of $366 million, -27% year over year or -28% in constant currency
Geography
- North America generated sales of $3.219 billion, up small year over year or flat in constant currency
- Europe, Middle East and Africa generated sales of $2.021 billion, +1% in constant currency
- Greater China generated sales of $1.512 billion, -9% year over year or -10% in constant currency
- Asia, Pacific and Latin America generated sales of $1.49 billion, 2% year over year or +1% in constant currency
Business Line
- Footwear generated sales of $7.41 billion, -1% year over year or -2% in constant currency
- Apparel generated sales of $3.313 billion, +7% in constant currency
- Equipment generated sales of $630 million, +3% in constant currency
Fundamentals
Nike is one of those firms that does not file a statement of cash flows along with the rest of the pertinent materials when it reports. That always ticks me off a little. The firm does not mention cash flows or free cash flow during its calls. In my opinion, as an investor/trader that actually does the homework, this is unforgivable. Just release all of the darned information that we need at one time and in one place like 95% of all the other major firms operating out of the U.S. It's not that hard. If you don't know how, ask your peers for help.
Rant over. Moving on to the balance sheet, Nike ended the quarter with a cash position of $8.575 billion and inventories of $8.114 billion. That put current assets at $23.898 billion. Current liabilities add up to $10.911 billion. There is almost no short-term debt on the books. This places the firm current and quick ratios at 2.19 and 1.45, respectively, which is not only solid, but actually exceptional for a firm operating a largely retail type of business.
Total assets amount to $37.334 billion, of which almost none is labeled as goodwill or as other intangibles. We appreciate that. Total liabilities less equity comes to $23.866 billion. Long-term debt accounts for $7.996 billion of that total, which is something the firm could pay off out of pocket if need be. I was angry after not seeing a statement of cash flows. After seeing a quality balance sheet like this, my inner ogre has been soothed.
Guidance
For the current quarter, Nike is projecting a low-single-digit decline in year-over-year percentage terms. Gross margin is expected to decline by about 300 to 375 basis points of which the company is expecting to blame roughly 175 basis points on tariffs. Wall Street had projected 225 basis points for the tariff-related impact.
Wall Street
Wall Street does not seem to be as impressed with Nike's turnaround as the pajama traders were overnight. The stock is up more than 3% a rough half hour after the opening bell but there is not a broad consensus endorsement across the community of sell-side analysts. Of the 13 analysts that I can find rated at a minimum of four stars at TipRanks, there are no upgrades. There are still seven "buy" or buy-equivalent ratings and still six "hold" or hold-equivalent ratings.
Of the 13, there are six target price increases, but none are major. One "hold" did not set a target, so we only have 12 of those to work with. Across the 12, after allowing for changes, the average target price for NKE stands at $80.75 with a high of $100 (twice, Matthew Boss of JP Morgan & Sam Poser of Williams Trading) and a low of $60 (Ike Boruchow of Wells Fargo).
My Thoughts
Improving sales, or at least sales that have stopped contracting. An optimistic CEO. Maybe that's enough. It is on Wednesday morning. The balance sheet is strong, but profitability is sagging, and corporate execution is still sloppy. Outside of the balance sheet, which does count for a lot with me. I am not yet impressed.
Readers will see that NKE developed a double-top pattern of bearish reversal with a $73 pivot this summer that worked like a charm. The stock found help either at its 200-day SMA (suggesting that professional managers defended the stock) or the 38.2% Fibonacci retracement level of the early April into late August Rally. The stock has since taken back its 21-day EMA, which got the swing crowd on board ahead of earnings.
On Wednesday morning, the 50-day SMA is in play. Should Nike take back that blue line, the professional managers that already defended the stock lower will be forced to increase their long side exposure. On the other hand, should Nike fail here to take that line, the algorithms that run price discovery in 2025 will recognize the double top as still intact.
My suggestion? Hold your fire. Take and hold the 50-day SMA and my target price would go to $86. Fail there and the 200-day line will face a retest. See that unfilled gap from late June? Yeah, the orange oval. The stock needs to see $60.82 in order to fill that gap. What do we know about gaps? They don't have to fill but they usually do. Cammy up. Cover your fighting hole with debris. Lay in wait. This stock will tell us which way it's going to go shortly. Patience.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
