Nike Stock Suffers Another Setback

Trimming Nike

On Thursday evening, footwear and athletic apparel giant Nike (NKE) released the firm's fiscal third quarter financial results. The shares are trading sharply lower in the aftermath.

For the period ended February 28, Nike posted a GAAP EPS of $0.35 on revenue of $11.279 billion. These top- and bottom-line results both beat Wall Street's expectations despite the fact that the sales number was only good for year-over-year growth of 0.1%. The broad investor disappointment was in the guidance provided, which we'll get into.

CEO Elliott Hill addressed the quarter in the press release:

"This quarter we took meaningful actions to improve the health and quality of our business. The pace of progress is different across the portfolio and the areas we prioritized first continue to drive momentum. The work is not finished, but the direction is clear, our teams are moving with focus and urgency, and our foundation is getting even stronger to build the future of NIKE."

Operations

As revenue was growing 0.1% to $11.279 billion, the cost of those sales increased 2.4% to $6.749 billion. This dropped gross profit 3.1% to $4.53 billion, on a gross margin of 40.2% (down from 41.5%). Operating expenses grew 2.3% to $3.977 billion, leaving a GAAP operating income of $553 million, which was down 29.8% year over year. That took the firm's operating margin down to 4.9% from 7%.

After accounting for interest, other income and expenses and taxes, GAAP net income dropped 35% to $520 million. This works out to $0.35 per fully diluted share, which compares quite poorly to the $0.54 posted for the year-ago period.

Product Revenue Performance

Footwear sales increased 2% to $7.353 billion, which beat expectations
Apparel sales dropped 0.3% to $3.184 billion, falling short of expectations
Equipment sales dropped 1.9% to $468 million, falling short of expectations
Converse sales dropped 0.3% to $3.184 billion, falling short of expectations

Geographic Revenue Performance

North America generated revenue of $5.026 billion (+3.3%), falling short of expectations
Europe, ME and Africa generated revenue of $2.874B billion (+2.2%), falling short of expectations
Greater China generated revenue of $1.615 billion (-6.8%), beating expectations
Asia Pacific and Latin America generated revenue of $1.49 billion (+3.3%), beating expectations

Balance Sheet

Nike typically takes up to two weeks after its earnings are published to release its statement of cash flows, so we do not have its operating and free cash flow numbers for the quarter reported at this time. Hence, we'll now move directly on to the balance sheet.

Nike ended the period with a cash position of $8.057 billion, which is down 23% year over year. The firm also holds inventories of $7.487 billion. That puts current assets at $23.184 billion. Current liabilities add up to $10.838 billion, including short-term debt of $999 million. This leaves the firm's current and quick ratios at 2.14 and 1.45, respectively. These ratios are strong and for a corporation involved in the business of retail, these ratios are very strong.

Total assets amount to $37.064 billion, which includes a very small number for goodwill and other intangibles. Total liabilities less equity comes to $22.974 billion. This includes long-term debt of $7.03 billion, which is something that the firm does have enough cash on hand to cover. Nike's balance sheet remains solid.

Guidance

For the current quarter, Nike expects a decline in revenue of 2% to 4%. There should be some growth in North America, but also a nasty 20% decline in Greater China and a decline for the Converse brand as well.

Gross margins are expected to drop 25 to 75 basis points on a year-over-year basis including a negative 250 basis point impact from tariffs. Most importantly, Nike is guiding current quarter earnings to be flat year over year from the $0.14 reported for that period. Wall Street was looking for something above $0.20. This guidance is the primary reason that investors are exiting this stock on Wednesday.

Opinion

The quarter reported was mediocre at best. The current quarter is expected to be flat-out awful. We don't know the cash flow story. There is almost no reason to be excited about Nike at this time. The firm's own management is telling you that the business is struggling. The balance sheet is healthy. That does count for something in my book but is not a reason to go out and take down an equity stake for its own sake.

Readers will see that the shares of Nike have been in an accelerated downtrend since August. Over the course of that time, the shares have been unable to take back either their 50-day or 200-day SMAs. On Wednesday morning, the shares have dropped even further below those lines. This is not just a reaction to poor guidance but a technical reaction to a double-top pattern (not really of bearish reversal, because the trend was already bearish) that formed late in the trend (illustrated here by a Raff Regression model).

The indicators are in terrible shape. Relative strength is now in technically oversold territory. On top of that, the daily MACD looks uglier than the creature from the Black Lagoon. It's not often that one sees the 12-day and 26-day EMAs trending that deep in the hole. Ugly!

Maybe I would speculate in the name and get long July 17 NKE $55 calls, but only if I could get them for less than a buck. There is no way I would even consider holding equity in this name until they prove themselves. It is clear that Nike has been unable to prove itself for about five years now.

At the time of publication, Guilfoyle had no positions in any securities mentioned.