SG&A surges in 1Q17 on rising demand creation expenses

Nike (NKE) reported an 11% YoY decline in operating income in 1Q17, as the company reported an increase in SG&A (selling, distribution, and operating) expenses, primarily driven by higher demand creation and overhead costs.

What Headwinds Could Affect Nike’s 2Q17 Results?

Overhead expenses rose 6% as the company continued to invest in expanding its digital capabilities, DTC sales, and operational infrastructure.

Demand creation expenses, which related to Nike’s investment in the Olympics and the European football championships in 1Q17, rose 25% YoY. Higher demand creation expenses reflect the increasing competition that the company is facing from Under Armour (UAA), Lululemon Athletica (LULU), and Adidas (ADDYY).

SG&A expenses expected to grow at a slower rate after 2Q17

Nike is looking for a mid-to-high-single digit growth rate in fiscal 2017 SG&A expenses. For the second quarter, the company is expecting SG&A productivity gains to partially offset the costs, leading to a low-to-mid-single-digit growth in SG&A.

Currency headwinds likely to continue through fiscal 2017

Nike’s top line was hit by around 200 basis points on account of currency headwinds in 1Q17. These headwinds are likely to continue through the year, as the US dollar remains strong.

Nike’s management has forecasted a high-single-digit to low-double-digit top-line growth on a currency-neutral basis for fiscal 2017. However, after including the adverse effects of currency fluctuations, the top-line growth is predicted at a high-single-digit rate.

ETF investors seeking to add exposure to NKE can consider the SPDR Dow Jones Industrial Average ETF (DIA), which invests 1.8% of its portfolio in NKE.

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