The Sell-Side Reacts To Nike (NKE) Q3 Report
(Updated - March 22, 2017 6:42 AM EDT) (Updated to add more analyst comments)
Tuesday evening Nike (NYSE: NKE) reported Q3 earnings. The company missed on the topline and issued some concern updates about futures orders. The full report can be read here.
In response to the 3%+ after hours sell off, which saw the stock trading as low as $55.52, the sell-side analysts woke up early to reiterate the long-term value that is baked into Nike, which we will share with you now.
BofA Merrill Lynch Robert Ohmes (Underperform-rated, $46.00 PT) - "We reiterate our Underperform on Nike given: (1) we believe Nike will continue to lose significant footwear and apparel market share to adidas in North America over the next 12-24 months; (2) the risk that the Nike VaporMax launch will miss high expectations as consumers respond poorly to new technical, futuristic looking product (like VaporMax) in the current casual athletic/functional sportstyle environment; (3) we believe Nike’s international inventory is still elevated, with revenue decelerating in Europe and China against tough comparisons; (4) Nike's d-t-c is decelerating as Nike laps elevated clearance that has been supported by excess inventory levels; and (5) FX and the Nike driven promotional environment should continue to pressure Nike’s GM outlook"
Piper Jaffray Erinn Murphy (Neutral, $51.00 PT) - "We remain cautious on NKE fundamentals given: 1) futures continued to decelerate Q/Q to -1% CC globally (NA -9% from -4%); 2) the stark Q/Q slowdown in digital from 46% to 18% (likely from rapid shift in NA/China toward adidas); and 3) the ongoing composition shift in EPS growth from GP $ (FQ4 GM% guided >100 bps below Street) to SG&A control. Post the call, we see potential for even greater near-term adidas' share gain in NA than before and see shelf-space risk rising for UAA. While the industry backdrop remains robust, we believe NKE shares remain range bound as the market digests the durability of adidas' resurgence."
FBR & Co Susan Anderson (Market Perform-rated, $53.00 PT) - "We like Nike's innovation pipeline, int'l runway, and LT margin catalysts, but we remain on the sidelines and look for improved rev growth, margin execution, and lower inventory growth."..."We rate shares of NIKE, Inc. Market Perform, driven by (1) expected EPS benefits from gross margin expansion from pricing/positive mix shifts; (2) sales growth potential from women’s, youth, and international (and DTC expansion); and (3) benefits from innovation and lean manufacturing, offset by what we view as a relatively full valuation for NKE shares."
Cowen & Co John Kernan (Market Perform-rated, $54.00 PT) - "NKE beat Q3 street EPS expectations on lower SG&A and tax rate, and below the operating line benefits. FY18 could see ~75 to 100bps of gross margin pressure from FX but NKE's new found SG&A leverage could help to offset. We reiterate our below consensus estimates for FY18 and $54 price target which equates to 22x FY18E EPS and 15x EV/EBITDA."
Instinet Simeon Siegel (Buy-rated, $60.00 PT) - "Recognizing 3Q’s several puts & takes (sales/GM came in light, futures missed but EBIT/EPS beat & Space Jam XI was the largest launch in NKE history), we continue to believe NKE’s ability & willingness to spend to grow is a competitive advantage that will drive ongoing outperformance & help best the competition."
Goldman Sachs Lindsay Drucker Mann (Buy-rated, Raises PT From $61.00 to $62.00) - "We raise FY17 EPS to $2.39 from $2.26 on the 3Q SG&A-driven beat, offset by weaker sales and gross margins in North America in 4Q. We maintain our FY18 EPS forecast of $2.45, as our below-consensus outlook already embedded material FX pressure. Looking ahead, we think management commentary on NKE's susceptibility to a troubled brick and mortar landscape is concerning, as it implies stunted growth for NKE in the market over the medium-term as structural headwinds work through."
Deutsche Bank Paul Trussell (Buy, PT to $64 from $66) - "Nike’s earnings print sounded alarm bells through (1) forecasting weaker than expected 4Q revenues, (2) missing 3Q GPM plan and guiding 4Q lower due to a promotional NA environment, (3) not giving specific FY18 guidance, which was expected (other than to cite major FX headwinds), and (4) futures slowing for the 5th consecutive quarter to -1% (on CC) from 2% last period. While the last point has less significance than in prior years, the preceding items net to a lowering of our FY18 EPS forecast by 3% and will restart the debate on the appropriate valuation. We stay the course with a LT favorable view and Buy rating as NKE remains a traffic driving consumer brand with pricing power (far from a commodity in retail) and the company’s new “Triple-Double” plan to double the (a) cadence and scale of product innovation, (b) speed of the supply chain, and (c) direct connections with the consumer, which should lead to an acceleration in top & bottom line in FY18 and beyond, in our view."
Susquehanna Sam Poser (Positive-rated, lowers PT from $65.00 to $64.00) - "We would take advantage of any weakness and buy shares of Nike following the company's 3Q17 EPS beat. Gross margins were a touch light in the quarter, but revenue was fairly in line, and we are seeing strong cost control benefits on the SG&A line from Nike's edit to amplify initiatives. In other words, Nike pulled one of its many levers to deliver upside. We believe Nike has a host of additional levers at its disposal to drive earnings upside going forward. Nike is leveraging its core competencies in the areas of innovation, marketing, and supply-chain in ways that we have not seen in quite some time. For example, Nike's triple-double initiatives are set to double the: 1. cadence and scale of innovation, 2. average speed-tomarket of new products from ~6 months on average to ~3 months, and 3. personal connections in the marketplace, resulting in higher customer engagement levels. Furthermore, ManRev supply chain initiatives should continue to drive gross margins, while Nike is also leveraging its partnerships with top sports leagues such as the NBA, and strengthening its relationships with top wholesale partners."
Barclays Matthew McClintock (Overweight-rated, $65.00 PT) - "While futures are surely disappointing, we believe investors should not be so quick to discount NKE’s track record of robust innovation: Additionally, NKE still remains in the early stages of the manufacturing revolution and we think the story becomes more attractive when it can fully reap the benefits of these initiatives. We are increasing our FY17 and FY18 EPS estimates to $2.45 and $2.85 from $2.35 and $2.70, respectively."
Citi Kate McShane (Buy-rated, $66.00 PT) - "NKE reported a Q3 EPS beat, witih revenues slightly softer than expected but more than offset by stronger SG&A leverage, Other income, & a lower tax rate. While North America now appears to be headed in the right direction, with cleaner inventory positioning, a robust product pipeline over the next 6mos, and a reinvigorated basketball business, results were tempered by increased caution around the shifting US retail environment (w/ heavier promotions expected ahead), negative futures, and increased f/x headwinds still to come in FY18. Retierate Buy on signs of improvement in North America (sales & inventory) and continued strength in international markets. We believe there are long-only investors that are looking to get more constructive on NKE as the company laps difficult NA dynamics."
Credit Suisse Christian Buss (Outperform-rated, $67.00 PT) - "...the "Triple Double" initiative – a focus on 1) doubling investments in innovation; 2) doubling speed to market; and 3) doubling direct to consumer sales – supports our long-term thesis that Nike can return to high-single digit revenue growth and teens EPS growth as the company benefits from mix-shift towards higher-margin DTC sales. Even with some operational delay, we continue to see Nike as a true standout in the softlines space." Buss also raises FY 2017 EPS while cutting FY 2018 EPS: "We are adjusting our FY17 revenue and EPS estimates to $34,375M and $2.44 from $34,636M and $2.37. Our FY18 revenue and EPS estimates go to $37,361M and $2.64 from $37,146M and $2.70."
Jefferies Randal Konik (Buy-rated, $75.00 PT) - "Athletic Footwear Remains Secular Winner, Nike Remains in Best Position to Win. Traffic at athletic and sporting goods retailers is up, and it is likely the only sector to see increasing traffic. This, combined with product innovation (e.g. Air Max in Running), market share gains in Bball, and, as evidenced by our data work, a growing retro trend, fortifies Nike's solid positioning in the category." Konik speaks directly to Nike's futures orders: "While NKE futures were (4%), we are not concerned as the metric is increasingly less correlated with total growth. Mgmt guided Q4 reported revenue growth to be +MSD%, with GM contraction to be slightly greater than 1Q'18 & 2Q'18. Based on mgmt commentary, we tweaked down our above cons. numbers for 4Q, but we maintain our FY'18 estimates. We believe the company is setting up for a 4Q beat."
(Chart Courtesy of TD Ameritrade ThinkOrSwim)