Nike Slips On Earnings, Traction Forecast For Later In The Year

Shipping Constraints Cut Into Nike Results 

Shares of Nike (NYSE: NKE) fell more than 2.0% in after-hours trading following the release of FQ3 earnings and we don't think it should have. The report was mixed to be sure but there is one mitigating factor and one Easter Egg that suggest both revenue and earnings will accelerate in the second half of the year. On the one hand, shipping constraints, a shortage of containers, and log-jams and U.S. ports are delaying product delivery by as much as three weeks. The shipping delays are cutting into sales because, in many cases, you can’t sell what isn’t on the shelf. On the other hand, widening margins promise accelerated earnings growth and EPS above the current consensus once the shipping issues are overcome. 

Nike Falls On Mixed Results But Outlook Is Positive 

Nike had a decent quarter that produced 2.6% YOY growth but there are two things marring the picture, at least in the near-term. The $10.36 billion in revenue missed the consensus by $0.61 billion or 620 basis points and growth slowed from the prior quarter’s +9.0%. The miss was driven primarily by shortfalls in the U.S. market that led sales in that region down 11.0%. The shortfall was partially offset by a 15% increase in NikeDirect, a 50% increase in eCommerce sales and strength in overseas markets. 

Moving down the report, the company’s gross margin improved by 130 basis points over the past year to 45.6% and beat the analysts’ consensus by 120 bps. The improvement was driven in large part by a 700 basis point decline in SG&A expenses coupled with reduced ad-spend. The bottom line results reflect the increase in margin, growing 80% YOY to $0.90 and beating the consensus by $0.14. 

The earnings results would have been much better if not for an increase in inventory. The company’s inventory increased by 15% YOY because of in-transit merchandise related to the aforementioned shipping issues. We expect these issues will persist throughout the 2nd quarter and not come into alignment until the 2nd half of the year. When that happens we expect to see Nike’s revenue and earnings growth re-accelerate. 

The Analysts Still Love Nike  

At least four major sell-side analysts have come out since Nike released its Q3 results. The consensus among them is that Nike delivered a high-quality beat despite the shipping challenges and that near-term headwinds will abate. BMO’s Simeon Siegel thinks the Q3 miss will be made up as early as the 4th quarter and we concur. RBC’s Kate Fitzsimons cited the strong brand, digital growth, and exposure to China when she reiterated her Outperform rating and upped her target to $165. The high price target of $183 is held by UBS Group but no word out of them yet. 

The Technical Outlook: Nike Pulls Back To Support 

Shares of Nike fell about 3.0% at the open of trading to find support at the short-term moving average. The EMA is near the mid-point of a trading range and should provide strong support for price action. Assuming the bulls are able to regroup at this level we expect Nike will move back to the top of the range and break out to new highs, possibly before the next reporting date. If support at this level does not hold shares of NKE may pull back to the even more attractive $130 level.