Nike Moves Higher After eCommerce Results Impress

Nike Is Successfully Navigating The Crisis

There is a crisis, to be sure, within the retail industry. The COVID-19 pandemic has brick&mortar retailers on the ropes but not all are feeling the pain. eCommerce has emerged as not only a lifeline, but a growth opportunity and Nike (NYSE:NKE) is cashing in on it. The company just reported 3Q earnings and blew the consensus right out of the water. What this means is the trend of upwardly revised earnings I’ve been noting across the market will probably gain momentum during the Q3 earnings reporting cycle.

Nike Revenue Falls But Shows Strength In Key Areas

Nike’s gross revenue fell for the quarter but that’s the only bad news to report. Moving on to the good news, the $10.6 billion in top-line revenues beat consensus by $1.45 billion or nearly 16%. Margins came in better than expected too and despite a shift to digital that has negatively impacted other retailers. The Gross Margin fell 90 basis points but beat consensus by 190. The decline is due to supply chain increases and marketing targeted to reduce inventory (ulitmately a good thing).

Nike reports slower traffic in all of it’s physical locations both company-owned and industry-wide. The offset is higher-conversions due to less browsing, those who come out to shop usually intend to buy. Slower traffic is also offset by a 12% increase in direct-to-consumer sales that are underpinned by eCommerce. eCommerce sales grew 82% on a YOY basis to account for 30% of total sales.

What this boils down to is earnings. The company reported a stunning $0.95 in GAAP EPS that is not only double the consensus but up on a YOY basis. Looking forward the company is expected to deliver another $0.52 in the calendar 4th/fiscal 2nd quarter and that estimate is likely too low. Regardless, the company is well on the way to crushing the analysts targets for fiscal 2021.

Analyst Camilo Lyon of BTIG said this in the wake of the report “Nike clearly is controlling its own destiny as evidenced by digital reaching 30% of total sales while concurrently driving high single digit growth in differentiated wholesale vs. the -20% decline in undifferentiated wholesale where it has started pulling inventory back from.” He raised the firm’s price target to $152 or 30% above Tuesday’s close and 15% above the pre-market action. Along with his, there are nearly 20 other upgrades or price hikes delivered today.

A Dividend Increase Is In The Cards For Nike

Nike is one of the companies that prides itself on its dividend calling special attention to the 18 year history of increases. That is important to note because the company is on track to deliver a distribution increase in November and it could be a big one. The company is sitting on ample amounts of cash and liquidity with both growing daily via earnings. The payout ratio is a low 39% leaving plenty of room on the cash-flow statement and the 5-year CAGR is above 12%. The only bad news is the yield which is now well below 1.0%.

 From Nike’s press release …

“NIKE has a strong track record of investing to fuel growth and consistently increasing returns to shareholders including 18 consecutive years of increasing dividend payouts. In the first quarter, the Company paid dividends of $384 million to shareholders, up 11 percent from the prior year.”

The Technical Outlook: Nike Goes Ballistic, But Wait For A Pullback

To say the Nike’s shares went ballistic after the news is a bit misleading. The company’s stock price has been in a strong uptrend since hitting the pandemic-bottom and only accelerated that trend today. Notably, the stock has created a substantially large gap so I don’t recommend chasing prices. At this level it is all but assured profit-takers will begin culling some shares and there is no-telling how deep the pullback could be. Until there is some sign of real support for this (or any) price level caution is the best course of action.