Moments ago one of the hedge fund community’s favorite “can’t miss” consumer discretionary stocks reported Q4 earnings when Nike announced it had earned $0.49 in the quarter, a penny above the $0.48 expected. Revenues missed modestly, printing at $8.24, vs Exp. $8.28.
And yet, despite the bottom line beat, the stock is tumbling after hours: the reason why is becasuse the all-important worldwide orders ex-fx rise 11%, less than the 13% expected, while margin of 45.9%, already a 30 bps drop from a year ago, missed estimates of 46.7%.
The company blamed rising product costs for the margin decline, saying: “Gross margin declined 30 basis points to 45.9 percent as higher average selling prices were more than offset by higher product costs, the negative impact of clearing excess inventory in North America and unfavorable changes in foreign currency exchange rates.”
Some more troubling signs: SG&A:
Selling and administrative expense increased 7 percent to $2.8 billion. Demand creation expense was $873 million, up 7 percent, reflecting investments in digital demand creation, sports marketing and brand events which were partially offset by lower advertising expense. Operating overhead expense increased 7 percent to $1.9 billion, reflecting continued growth in the Direct-to-Consumer (DTC) business, and targeted investments in operational infrastructure and consumer-focused digital capabilities.
Unlike peers, Nike was surprisingly blunt about the flow through to the bottom line:
Net income decreased 2 percent to $846 million as revenue growth was more than offset by lower gross margin, higher selling and administrative expense and a higher tax rate, while diluted earnings per share remained unchanged from the prior year at $0.49 reflecting a 2 percent decline in the weighted average diluted common shares outstanding.
Finally, if one excludes FX changes, Nike’s orders were even weaker. Considering the last quarter saw a far weaker dollar than a year ago, it is not exactly clear how this number is applicable.
This is how orders compare to estimates:
- North American futures orders ex-FX up 6.0%, est. up 9.0%
- Western Europe futures orders ex-FX up 11%, est. 15.5%
- Central & Eastern Europe futures orders ex-FX up 7%, est. +12.0%
- China futures orders ex-FX up 24%, est. 23%
- Japan futures orders ex-FX up 15%, est. +12.8%
- Emerging marketsfutures orders ex-FX up 13%, est. +12.5%
Finally, for those who track it, NKE inventories as of May 31 were up 12%.
The stock was down about 6% on the news, and is now back to levels not seen since the August 2015 crash.
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