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Nike: A 1Q19 revenue and earnings beat, but gross margins disappoint

Nike Inc. on Tuesday (25 September) posted a 10% YoY rise in 1Q19 revenue to $9.95bn, while net income increased to $1.09bn or USc67/share (+17.5% YoY). Both revenue and EPS beat Thomson Reuters consensus forecasts (of $9.94bn and USc63/share, respectively), however gross margins disappointed rising by 50 bpts to 44.2%, in-line with Thomson Reuters consensus estimates. The company said that selling and administrative expenses increased by 7% YoY to $3.1bn, including “demand creation” expenses of $964mn, up 13% YoY, driven by sports marketing investments, brand campaigns etc. The effective tax rate for the quarter was 14%, reflecting the implementation of US tax reform last year.

This was Nike’s second straight quarter of growth in its home market, with US sales rising to $4.15bn – up 6% YoY. Overseas results were mixed with Nike beating sales estimates in the Europe/Middle East/Africa (EMEA) region but missing estimates in Greater China and its Asia Pacific/Latin America (APLA) sector. We note though that despite this, China constant currency revenue still grew by 20% in the quarter and digital posted impressive 40% YoY growth. This was also the 17th consecutive quarter that Nike posted double-digit revenue growth in Greater China. Nike CEO Mark Parker has said that 75% of Nike’s growth in the next few years will come from overseas.

At Converse, revenue increased 7% YoY on a constant currency basis, fueled by double-digit revenue growth in Greater China and strong double-digit growth digitally. Converse did however experience declines in undifferentiated wholesale, primarily in the US and the UK. Nike said on the conference call that it will be expanding Converse’s product portfolio while also elevating the Converse branded digital ecosystem during the course of FY19.

Nike shares have had an impressive run this year, climbing 36% up to Tuesday (25 September) but the share price has declined 2.7% WoW following these results. Shares fell by as much as 3% on Wednesday (26 September) as Wall Street seemed disappointed by the company not raising its full-year forecast despite the top-line outperformance and even as sales have been buoyed by its controversial ad campaign featuring former NFL player Colin Kaepernick. The firm said that it expects revenue growth to be up in the high single-digits and margins to improve. However, we note that with the share price trading at record highs (it closed at an all-time high of $85.26/share on 18 September) there was likely limited space for upside following the results.

The current quarter ended on 31 August, a few days before the firm unveiled the Kaepernick ad campaign. Edison Trends’research, which scans receipt data from more than 200 online retailers (including Nike.com), has suggested that the company’s sales in the current quarter (2Q19) are tracking ahead of last year.



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