Evaluating Nike’s 1Q17 earnings performance

As discussed, Nike (NKE) reported better-than-expected revenue and earnings in 1Q17. EPS (earnings per share) rose 9% YoY (year-over-year) to 73 cents. In comparison, Wall Street was expecting a decline of 16.7% to 56 cents.

Nike’s Gross Margin Likely to Take a Hit in 2Q17

How good was the first quarter?

However, the company’s first quarter performance was not as impressive as it seemed, as most of the bottom-line growth was driven by a lower tax rate and a decline in average share count. In fact, the company took a 200-basis-point hit on gross profit on account of a greater off-price sales mix, currency fluctuations, and the company’s exit from the golf equipment business.

Nike’s 1Q17 gross margin of 45.5% was lower than most of its peers. Columbia Sportswear (COLM), Under Armour (UAA), and Lululemon Athletica (LULU) reported gross margins of 46.2%, 47.7%, and 49.3%, respectively, for Nike’s 1Q17.

How will 2Q17 gross margin turn out?

Nike is not expecting any material improvement in its gross margin in the near term. The company has, in fact, forecasted a 125-basis-point-fall in the gross margin rate in 2Q17.

For the second half of fiscal 2017, management is looking for a flat gross margin rate versus the previous year. As a result, Nike would miss its target of increasing its gross margin rate at an average of 30 to 50 basis points annually through fiscal 2020.

What will drive 2Q17 gross margins?

While the company expects margins to be positively impacted by its productivity-enhancing initiatives and higher full-price average selling prices, temporary headwinds like currency fluctuations are likely to wash away most of the gains.

ETF investors seeking to add exposure to NKE can consider the ProShares Ultra Consumer Goods ETF (UGE), which invests 2.3% of its portfolio in NKE.

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