Has Nike’s Fiscal 3Q17 Earnings Beat Impressed the Market?

Nike beats its fiscal 3Q17 earnings expectations

Nike reported a 23.6% YoY (year-over-year) rise in its earnings per share (or EPS) to $0.68 during fiscal 3Q17. The company outperformed Wall Street analysts’ estimate by a huge margin. Analysts were expecting a 3.6% YoY fall in its EPS to $0.53.

Has Nike’s Fiscal 3Q17 Earnings Beat Impressed the Market?

Why this earnings beat failed to impress

While the company has delivered its 19th straight quarterly earnings beat, a closer look reveals that the picture isn’t so rosy, at least in the current quarter.

Nike’s earnings beat was largely the result of the following:

  • a fall in its tax rate by 250 basis points to 13.8%
  • a fall in its average share count, a rise in its other income by $88 million
  • a fall in its demand creation expenses by $55 million, or 7% YoY

However, the company’s margins contracted, reflecting the poor quality of its earnings. Its gross margin contracted 140 basis points to 44.5% as it struggled with higher product costs, higher off-price sales, and currency headwinds. The company took a 200-basis-point and a 140-basis-point hit on its gross profit in fiscals 1Q17 and 2Q17 due to these same factors.

Nike has a lower margin than most of its peers

Nike’s trailing-12-month gross margin stands at 45%, lower than the margins of its competitors Under Armour (UAA), Lululemon Athletica (LULU), Columbia Sportswear (COLM), and Adidas (ADDYY), which have trailing-12-month margins of 46.5%, 49.8%, 46.7%, and 48.7%, respectively.

ETF investors seeking to add exposure to NKE can consider the ProShares Ultra Consumer Goods ETF (UGE), which invests 2.4% of its portfolio in NKE.