Margins were a disappointment for some
As we saw in the previous part of this series, Nike (NKE) delivered strong results for the first quarter of fiscal 2019, showing balanced strength across all product categories and businesses. The company saw strong full-price selling and reported tightly managed inventories.
The Nike brand also seems to be coming out of the year-long slump in North America, which is very important since North America still accounts for more than 40% of Nike’s sales.
However, margins were one area that failed to please investors. While Nike’s gross margins improved 50 basis points to 44.2% of sales and were broadly in line with the average analyst estimate, investors were expecting more. Nike has been actively trying to focus on its own channels, which have higher margins.
“I think where the market might be slightly disappointed is around the gross margins…it is slightly weaker than expected,” explained MainFirst Bank analyst John Guy.
Guidance not up to expectations
Nike management reiterated its fiscal 2019 guidance and said it expects revenue growth at the lower end of the previously guided range, primarily due to currency headwinds.
“We expect revenue growth in the high single digits, albeit at the lower end of that range as operational upside will likely be somewhat offset by FX headwinds,” said Nike’s CFO Andrew Campion in the post-earnings call.
While explaining the reason behind FX headwinds, he added, “Global trade uncertainty and geopolitical dynamics have resulted in the dollar strengthening and foreign exchange shifting to a slight headwind.”
Nike management also said it expects the same revenue growth and gross margin expansion during the second quarter as it delivered in the first quarter. However, the market was expecting more since Nike has launched its successful ad campaign featuring former NFL quarterback Colin Kaepernick in the second quarter, which should have boosted the company’s sales significantly.