Nike reports 24% y-o-y decline in Q1 2018 earnings

Apparel and footwear manufacturer Nike Inc (NYSE: NKE) reported mixed fiscal 2018 first-quarter results, last Wednesday. While the revenues failed to beat estimates, the adjusted earnings surpassed expectations.

A strong growth in China was mainly responsible for the company to beat earnings estimates. However, revenues from the North American market declined during the quarter. The stock, which closed at $51.85 on Friday, is expected to remain bearish due to reasons given below.

The Beaverton-based company reported almost flat first-quarter revenues of $9.07 billion, compared with $9.06 billion in the same period last year.

During the quarter ended August 2018, Nike recorded a net income of $950 million, down 24% from $1.25 billion in the corresponding quarter of fiscal 2017. On a per share basis, earnings were $0.57 in Q1 2018, compared with $0.73 in Q1 2017. Analysts had expected Nike to post earnings of $0.48 per share on earnings of $9.08 billion.

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Net income decreased mainly due to a 3% increase in the cost of sales to $5.11 billion and a 8% increase in the overhead expense to $2.001 billion. The gross margin was 43.7%, down 180 basis points mainly due to the negative impact of currency conversion rates and, to a lesser-extent, a higher mix of off-price sales.

Region wise, North American revenues declined 3% y-o-y to $3.924 billion. The sales of footwear, apparel, and equipment declined by 3%, 1%, and 3%, respectively. The Europe, Middle-east, and African revenues was $2.344 billion, up 4% on a y-o-y basis. The sales of footwear, apparel, and equipment increased 1%, 9%, and 7%, respectively. Greater China revenues increased 9% to $1.108 billion in the first-quarter of 2018, from $1.102 billion last year. The footwear and apparel revenues increased 7% and 15%, while equipment revenues decreased 7%. The Asia Pacific & Latin America revenues grew 5% to $1.189 billion. The footwear and apparel revenues increased 5% and 8%, respectively, while equipment revenues declined 6%.

Nike’s inventories increased 6% y-o-y to $5.20 billion at the end of Q1 2018. Cash and cash-equivalents were $5.50 billion, up $732 million from the year-ago period. Commenting on the results, Camilo Lyon, an analyst at Canaccord, stated that Nike has made little progress in its aim to achieve a turnaround in operations and continues to stagnate in innovation. Thus, considering the mixed Q1 2018 results, increasing inventories, and strong competition, we anticipate the stock to remain bearish in the short-term.

The stock formed a bearish gap in mid-September and has not recovered so far. Furthermore, the momentum indicator is moving below the reading of 100. Thus, we expect the stock to slide and reach the next major support level of 49.80.

To capitalize on the downtrend, we are considering an investment in a put option, which remains active until October 10 th . The investment will be made only when the stock trades near $52 in the cash market.

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