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Nike’s 3Q17 Earnings to Fall as Costs Continue to Rise

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Nike’s earnings

As we discussed previously, Nike (NKE) will be reporting third quarter results on March 21. The company is expected to record a fall of 3.6% YoY (year-over-year) in earnings to 53 cents per share.

The company beat earnings expectations in the first two quarters of 2017. Earnings per share (or EPS) had increased by 9% YoY in 1Q, followed by an 11% jump in 2Q. In comparison, Wall Street had predicted a 16.7% and 4.4% fall in profits in these two quarters.

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A look at gross margins

While Nike performed better than expected, its margins have actually deteriorated over the year. The company took a 200-basis-point and a 140-basis-point hit on gross profit in Q1 and Q2, respectively, as it incurred higher costs on account of increasing product costs, a higher mix of off-price sales, currency fluctuations, and Nike’s exit from its golf equipment business.

Gross margin stood at 45.5% in Q1 and 44.2% in Q2. The company’s trailing-12-month gross margin stands at 45.4%. The company’s margin is lower than the margins of Under Armour (UAA) and Addidas (ADDYY) at 48.7% and 46.5%, respectively.

The company expects less contraction in gross margin in the second half of the year as it targets higher full price sales. For the third quarter, management has predicted gross margin contraction to be in the 100–125 basis point range.

Operating margin

While the operating margin contracted in 1Q17, the company bounced back in 2Q with a 140-basis-point expansion. This improvement was mainly driven by a decline in demand creation and overhead expenses, which led to a 2% decrease in SG&A expenses. However, in 3Q17, the management expects SG&A to grow at a mid-single to high-single-digit rate.

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.

Read about the company’s stock market performance in the next section.

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