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Nike’s Gross Margin Could Improve More in Fiscal 2019

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A look at Nike’s bottom line

Nike’s (NKE) EPS declined more than 4% in fiscal 2018 since it saw a deceleration of 22% and 8% in the first and second quarters, respectively. It was largely a result of a falling gross margin, which was mainly due to currency headwinds.

The fourth quarter, however, was much stronger, and EPS increased a solid 15% YoY (year-over-year), fueled by healthy sales growth, improvement in gross margin, and a lower tax rate.

Wall Street expects an 8.8% growth in Nike’s first quarter of fiscal 2019 EPS to $0.62. Nike hasn’t missed Wall Street’s earnings expectations for 24 consecutive quarters.

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Nike’s gross margin

Nike’s gross margin has fallen for eight consecutive quarters before finally improving 60 basis points in the fourth quarter of fiscal 2018. Margin improvement in Nike Direct, higher average selling prices, and a favorable full-price sales mix were primarily behind its margin growth.

Nike’s TTM (trailing-12-month) gross margin continues to be lower than most sportswear companies. Nike has a TTM margin of 43.8%. In comparison, Adidas (ADDYY), Sketchers (SKX), and Lululemon Athletica (LULU) have higher margins of 51.4%, 47.6%, and 54%, respectively.

Looking forward

Nike management expects its gross margin to expand at least 50 basis points in fiscal 2019, once again driven by higher full-price sales, an increase in average selling prices, and growth in Nike Direct. In the first half of the year, Nike could see slower growth than the second half.

However, the company is not expecting any SG&A (selling, general, and administrative) leverage in fiscal 2019 since those expenses are expected to increase at the same rate as sales. Investments in digital expansion, product innovation, and brand marketing are likely to push SG&A expenses, especially in the first half of the year.

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