Nike Inc. (NKE.NYSE)
21 March 2018
Just Growth It
Nike underdelivered on growth in the United States for the second straight quarter, this was in the backdrop of a competitive domestic marketplace. It is apparent that returning to strong growth in the US will not be achieved over a single quarter. Growth internationally however, was impressive, led by strong sales from Europe and most importantly China. We are pleased to see that the Nike brand is gaining increasing traction in China, an area where other international companies have publicly failed. Despite the pressures on US growth we remain buy rated on Nike as we believe that the company’s powerful brand will eventually fuel a return to growth.
Q2 Earnings Highlights:
• Revenue growth positive led by strong international markets.
• Continued growth margin compression
• Management continued to aggressively buy back shares and increased dividend payout by 10%.
• Company remains powerhouse with global brand, huge
potential in China.
Revenue:
Second Quarter 2018 revenue came in at a tick over $8.55 billion for NKE. This beat
market expectations by $150 million and was an increase of 4.5% year on year. The
quarter was again characterised by struggling North American sales that declined 5% year on year from $3.65 to $3.49 billion. We believe that it could take some time before growth returns in its North American markets, this is due to competitive pressures from brands such as Under Armour and Adidas.
The tepidness of its North American market was more than offset by international sales that were up 14.19% year on year. This was led by Europe, Middle East & Africa that grew 19% from $1.79 to $2.13 billion year on year. Growth was also strong in China, up 16% from $1.06 to $1.22 billion year on year. We are very pleased with the growth in the Chinese market as it indicates that the Nike brand is continuing to gain traction in a market that has tremendous potential.
For these reasons, Nike fits within our “dining boom” theme as they will be set to benefit from changing consumer consumption patterns.
Earnings & Margin:
Diluted earnings per share came in at $0.46, down 8% from Q2 2017. Similar to the first quarter, the company said this was due to gross margin decline and a higher selling and administrative expenses. This offset revenue growth, lower tax rates and a lower share count. This trend is concerning as for the last few quarters the company is having to sell more to make similar amounts of money.
Gross margin’s declined 120 basis points to 43%. The company puts this down to unfavourable exchange rates and higher product costs. Selling and administrative expenses increased 10% to $2.8 billion.
Dividends and Share Repurchases:
The company repurchased a total of 16.7 million shares for $907 million. This suggests an average purchasing price of $54.31. With a current share price of $66.80 this indicates that the company has been able to prudently repurchase stock. This reduction in share count had a net impact on diluted earnings per share of 2%. The company has approximately another $6 billion remaining in its 4-year, $12 billion share repurchase scheme.
The company paid a dividend of $0.20 per share in the second quarter. This was a 10% increase on the $0.18 per share paid in the second quarter of 2017. It is the 16th straight year that Nike has increased its dividend and we expect this trend to continue.
Quote:
“This quarter, led by our Consumer Direct Offense, we accelerated growth and built underlying momentum in our domestic business…for the back half of the fiscal year,
NIKE’s innovation line-up is as strong as it’s ever been and we’ll continue to actively shape retail through new differentiated experiences” – CEO Mark Parker.
Guidance:
The company did not issue guidance. We do not mind this as it can indicate the
management is thinking long term. We would really like to see North American sales
growth in order for the share price to regain some of its mojo.
Summary:
Despite being offset by impressive international revenues, total company growth
continues to be disappointing due to lacklustre US sales. We are particularly excited
about strong growth in China, we believe that this market has huge potential for
Nike. This problem is being compounded on the bottom line by increasing margins and
we expect it to take a few quarters to work its way through. The company continues
to be favourable to shareholders as it follows a policy of annual dividend increases and
aggressive share buy backs. We remain buy rated on Nike as we believe that the
company’s strong brand will eventually fuel a return to growth in the United States.