Earnings trend

Nike (NKE) has exceeded analysts’ earnings expectations for 26 consecutive quarters. Nike’s adjusted EPS rose 13% on a year-over-year basis to $0.52 in the second quarter of fiscal 2019, which ended on November 30, 2018. The company’s adjusted EPS beat analysts’ expectation of $0.46.

The growth in Nike’s fiscal second-quarter adjusted EPS was driven by strong revenue, a gross margin improvement, and a lower average share count due to share repurchases. However, a rise in its expenses and its higher effective tax rate dragged on its earnings growth.

What Analysts Expect from Nike’s Q3 2019 Earnings

Nike’s gross margin expanded 80 basis points to 43.8% in the second quarter of fiscal 2019 and 70 basis points to 44.0% in the first six months of fiscal 2019. The improvements in both periods were driven by higher full-price sales and enhanced margins in the Nike Direct business partially offset by higher product costs and currency headwinds.

The company’s operating margin contracted over 30 basis points to 10.3% in the second quarter of fiscal 2019 due to higher wages and increased advertising and marketing expenses for Nike Direct. Nike’s operating margin expanded ~50 basis points to 11.9% in the first six months of fiscal 2019 as its higher gross margin offset the impact of its increased expense rate.

Profitability expectations

Analysts expect Nike’s adjusted EPS to fall 6.3% to $0.64 in the third quarter of fiscal 2019, which ended on February 28, 2019. Higher expenses and currency headwinds are expected to weigh on the company’s fiscal 2019 third-quarter bottom line. For fiscal 2019, which ends on May 31, 2019, analysts expect Nike’s adjusted EPS to rise 11.7% to $2.67.

Nike expects its fiscal 2019 gross margin to expand 70 basis points. The company expects its third-quarter gross margin to be roughly in line with its fiscal 2019 outlook. Nike’s operating margin could come under pressure due to higher SG&A (selling, general, and administrative) expenses. Nike expects its SG&A expenses to grow in the low-double-digit range in the third quarter and in the high-single-digit range in fiscal 2019. Investments in digital capabilities and other strategic investments are expected to lead to growth in its expenses.

Let’s look at Nike’s valuation in the next article.

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