Currency Headwinds, Off-Price Sales Could Affect NKE’s Fiscal Q4



Nike’s fiscal 4Q17 margins expected to fall further

As discussed, Nike (NKE) will report its fiscal 4Q17 results on June 29, 2017. Its earnings during the quarter are expected to rise 2% YoY (year-over-year) to $0.50 per share. The company has delivered beats on its earnings in the last 19 consecutive quarters.

However, the quality of Nike’s earnings has deteriorated over the last couple of quarters. For instance, its fiscal 3Q17 beat was driven by a fall in its average share count, a fall of 250 basis points in its tax rate to 13.8%, an $88 million rise in its other income, and a 7% fall in its demand creation expenses to $55 million.

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Its gross margin, however, contracted during the quarter. Its margin contracted 140 basis points to 44.5% of sales as it struggled with a rise in the proportion of its off-price sales, higher product costs, and currency headwinds. This was the fourth consecutive quarter in which Nike’s margin contracted. The company also took 200-basis-point and 140-basis-point hits in its fiscal 1Q17 and fiscal 2Q17 gross margins, respectively.

For fiscal 4Q17, the company has predicted a contraction of 150–175 basis points in its gross margin. As in the last several quarters, this contraction will likely be driven by a highly promotional environment, especially in North America, along with ongoing foreign exchange headwinds.

Earlier this month, Nike announced that it would eliminate 1,400 jobs, or 2% of its workforce, in order to improve its margins. It also announced that it would reduce its number of sneaker styles by about one quarter to better tackle rising competition and changing customer preferences.

Nike has lower margins than its sportswear peers

Nike has delivered a gross margin of 45% in the last 12 months. Its gross margin is lower than those of most of its close competitors. Lululemon Athletica (LULU), Under Armour (UAA), Columbia Sportswear (COLM), and Sketchers (SKX) have trailing-12-month gross margins of 51%, 46%, 46.8%, and 46%, respectively.

ETF investors seeking to add exposure to NKE can consider the ProShares Ultra Consumer Goods ETF (UGE), which invests 2% of its portfolio in NKE.

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


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