Nike’s Earnings Fell 22% in 1Q18: Here’s Why



Nike beats on 1Q18 earnings

Nike reported a 21.9% YoY (year-over-year) fall in earnings to 57 cents per share when it reported first-quarter results on September 26. The company, however, outdid Wall Street expectations by 9 cents.

This was Nike’s 21st consecutive earnings beat and the first time in the last 20 quarters that the company’s earnings reported a year-over-year decline.

The fall in earnings was driven by “planned gross margin contraction and a higher effective tax rate, which were partially offset by a slight SG&A leverage and a lower average share count,” said Andy Campion, Nike’s executive vice president and chief financial officer, during the earnings call.

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Gross margin deteriorated for the sixth quarter

The current quarter marked the sixth consecutive quarter of gross margin declines for Nike. 1Q18 gross margin contracted 180 basis points to 43.7% of sales. While 130 basis points of this decline were due to FX headwinds, the remainder was a result of a higher mix of off-price sales.

SG&A expenses were, however, down 1%, driven by an 18% fall in demand creation expenses.

Comparing Nike’s margins to peers

Nike’s trailing-12-month (or TTM) gross margin of 44.6% is lower than most of its sportswear competitors. In comparison, Adidas (ADDYY), Under Armour (UAA), and Lululemon Athletica (LULU) posted TTM margins of 48.9%, 45.8%, and 51.5%, respectively.

Looking forward

Nike’s management expects a 50 to 100 basis point fall in reported gross margin in fiscal 2018, driven mainly by the challenging US retail environment.

For the second quarter of 2018, gross margin is expected to contract at the same rate as it did in the first quarter. The decline is likely to be mostly anchored by FX headwinds.

ETF investors seeking to add exposure to NKE can consider the ProShares Ultra Consumer Goods ETF (UGE), which invests 2.2% of its portfolio in NKE.

Read about the company’s stock market performance and analyst recommendations in the next part of this series.


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