Halister News

(Bloomberg) -- Nike drops 3.6% pre-market to $51.17 after last night reporting 4Q gross margin, rev., futures orders that missed estimates. From statement:

• 4Q worldwide futures orders ex-FX up 11% vs est. +13% (Consensus Metrix avg of 20).
  • North American futures orders ex-FX up 6.0%, est. up 9.0%
  • Western Europe futures orders ex-FX up 11%, est. 15.5%
  • Central & Eastern Europe futures orders ex-FX up 7%, est. +12.0%
  • China futures orders ex-FX up 24%, est. 23%
  • Japan futures orders ex-FX up 15%, est. +12.8%
  • Emerging markets futures orders ex-FX up 13%, est. +12.5%
• 4Q EPS 49c, est. 48c
• 4Q rev. $8.24b, est. $8.28b
• 4Q gross margin 45.9%, est. 46.7%
  • Gross margin declined 30bps y/y as higher ASPs “were more than offset” by higher product costs, negative impact of clearing excess inventory in North America, FX
• Inventories as of May 31 up 12% vs 4Q rev. up 6%

From call:

• Sees 1Q sales up mid-single-digit percent vs est. up 9%
• North America 1Q sales to show growth, with growth accelerating over rest of year
• Targets 1Q gross margin to decline ~100bps, mostly due to FX
  • 1Q N. America gross margin will contract as co. completes clearance of excess inventory with return to gross margin expansion over course of year
• Expects mid-to-high teens SG&A growth in 1Q, as co. makes strategic investments in demand creation around key sporting events such as Olympics, European football championships
• Reiterates FY2017 sales forecast of up high-single digits; est. up 10%
• Sees FY17 gross margin expansion of 30-50bps
• For total SG&A, expects full year growth in high-single digit range
• Latest FX volatility didn’t affect annual sales view
• Nike.com sales up 46% in FY2016; adding 20 countries this year for total of 40
• Marketing spending up 7% in 4Q; up 2% for year
• Says North America in 4Q had tough comparison y/y from port strike

STIFEL (Jim Duffy)

• Though NKE articulated “confident tone around brand

momentum,” channel inventory mgmt, positioning in key verticals/regions, 1Q forecast implies co. will need to see reacceleration in trends to meet FY17 targets

• Inventory imbalances in N. America remain “a challenge"; while full-price channel partners are reportedly clean, clearance efforts in factory stores, 3rd party channels will persist, possibly through 2Q
• Outlook for acceleration through year ‘‘is uncharacteristic of NIKE’s typical conservatism”
• Rates buy, PT to $68 from $73; FX headwinds, more volatile macro picture leads to “slightly more cautious” stance on N-T fundamentals

GOLDMAN (Lindsay Drucker Mann)

• 4Q report showed N. America is soft, hurt by adverse timing of wholesale shipments (although NKE believes it’s bottoming), solid momentum overseas, particularly W. Europe, China
• Key controversy for stock is whether mgmt’s outlook for high-single-digit sales growth, 30-50bps of gross margin expansion over next 12 mos. is realistic
• Mann ultimately thinks sales targets are achievable based on mid-single-digit N. Am sales in 4Q (adjusted for shipment timing), continued progression in normalizing N. Am inventory levels, strong momentum overseas
• Keeps buy as rev. targets look achievable, “compressed” valuation; PT to $66 from $67

COWEN (John Kernan)

• 1Q Forecast “significantly worse than consensus,” on top of 4Q’s gross margin miss; hoping 1Q gross margin view turns out to be conservative
• Acceleration in sales, gross margin trends are needed to achieve FY17 forecast, bolster confidence in 2020 targets
• Keeps outperform, PT $65; sees shares as cheap on after- hours prices based on L-T potential, NKE’s dominant global position
  • NKE can probably step up share repurchases significantly

WELLS FARGO (Tom Nikic)

• 4Q print “noisy,” with several signs of continued strength

(solid international rev. growth, futures up double digits incl. pricing +7%), as well as “several cracks in the armor” ** Cites 3rd straight rev. miss (vs consensus); N. America sales were only flat (first time in >6 years), soft domestic futures; 1Q sales, margins forecasts “significantly below” street (skewing to 2H even more than expected); inventories remain somewhat elevated (+12% vs. mid-single digits 1Q sales forecast)

• Believes these developments are partially driven by stiffer competition from Adidas, Under Armour
• Rates market perform, valuation range to $56-$58 from $58- $62

BREAN CAPITAL (Eric Tracy)

• 4Q “a bit mixed quality"; liquidation headwinds came in above Brean’s model but ‘‘more than offset by lower-than- expected demand creation spend”
• Although have noted challenges to 2016 Olympics (Zika, absence of key athletes), planned demand creation spend acceleration (1Q SG&A guided +mid-teens) suggests mgmt not backing off opportunity to capitalize on mega-sporting event platform
• While Europe/intl performance remains somewhat leveraged to global macro trends, NKE has numerous rev./EPS levers “entirely within” its control, including continued growth in DTC, “revolutionary” manufacturing (automation, proprietary processes)
• Keeps buy, PT to $62 from $68

JEFFERIES (Edward Plank)

• N-T challenges “are real, but these too shall pass"; running remains strong, basketball sell-throughs are improving
• Expects ‘‘some choppiness’’ in 1H, especially in N. America, where futures ‘‘were more subdued”
• Reiterates buy, PT to $65 from $67; “very optimistic on 2H,” L-T view given NKE’s “superior global brand positioning and encouraging new product reads, pipeline ahead

PIPER JAFFRAY (Erinn Murphy)

• Quality of 4Q EPS ‘‘not what we anticipated,’’ with misses on inventory levels, gross margin; lower corporate overhead supported 8c of EPS, other income 1c
• 1Q gross margin forecast ‘‘tied largely to FX”
• Reiterates overweight, PT to $58 from $69

SUSQUEHANNA (Christopher Svezia)

• Some 4Q surprises will continue to weigh on shares in N-T, including weak sales, disappointing gross margin, weaker 1Q impacted by FX, N. America challenges (Brexit likely also factor)
• Bright spots: strength in other key regions (W. Europe, China), solid futures/pricing, a reiterated FY17 forecast of up low-teens EPS growth
• While NKE likely remains in “penalty box” until the dust settles’’ in 1Q, still likes story given EPS acceleration visibility, solid L-T runway, opportunity on valuation given that the company now trades below its main peers
• Maintains positive, PT to $68 from $74

DATA

• NKE avg. absolute change after prior 8 earnings 4.8%: Bloomberg data
• Shares rose after 5 of past 8 reports
• NKE has 25 buys, 9 holds, avg PT $68 (27% upside from yesterday’s close): Bloomberg data
• NKE -15% YTD through yesterday’s close vs UA -9.9%, Adidas +40%
• NOTE: Last night, Nike’s Asia Suppliers May Fall as Orders Spark Slowdown Concerns