Nike Inc. (NKE, Financial) revealed a mixed report for its third quarter earnings for fiscal 2015 with earnings topping the consensus estimate but revenues coming in below expectations as the company grappled with the negative headwinds of a stronger dollar. The sports apparel retailer logged 89 cents per share for the third quarter on $7.46 billion in sales, compared to projections for 84 cents per share on revenues of $7.62 billion. During the year-ago quarter, the company had logged earnings of 75 cents a share on revenues of $6.97 billion. Nike’s shares rose around 4.4% in after-hours trading to $102.69 following the results.
Strong dollar, negative equipment sales drag revenue
Nike reported 7% rise in sales during the third quarter to $7.5 billion compared to revenues of $7 billion in Q3 2014, with foreign currency headwinds clipping a full 6% off the company’s growth. However, profits grew 16% to $791 million compared to $682 million in the year-ago quarter. Sales at the company’s Converse and Nike brands grew 33% and 11% respectively on a constant currency basis. Nike’s gross margin for the quarter expanded 140 basis points to 46% on the back of the company’s continuing shift to products with higher margins. Gross margin was partially offset by warehousing costs and greater product outputs. The company also reported 11% increase in future orders at its Nike brand on constant currency, beating the consensus estimate of 9.9% growth.
With the company generating over half its revenues from outside North America during the third quarter, Nike felt the pinch of a strengthening dollar compared to major global currencies. Revenues for the world’s largest athletic-gear maker grew in all of the four largest global regions it serves, including a 6% increase in North America and double-digit growth in greater China and Western Europe. However, the dollar, which has surged almost 10% relative to key global currencies, ate into the sales Nike generated from Japan as well as Eastern and Central Europe, leading to net sales declines in the regions.
Notably, while sales of shoes and apparel continue to grow, growth at the company’s sports equipment segment that includes products like baseball gloves and golf clubs is relatively flat. Nike saw equipment sales during the first three quarters slipping 1%, far underperforming the 15% surge for footwear and the 8% increase for apparel.
The road ahead
For the fourth quarter of 2015, Nike expects a low double-digit year-over-year growth in revenues, adjusting for currency fluctuations, while growth is expected decrease by about 8-9 percentage points when the impact of the strong dollar is taken into account. Consensus estimates peg the company’s revenue to grow 5.1%, while gross margin is likely to be flat to up 25 basis points.
The company, which competes with archrivals Adidas AG (ADS, Financial) and Puma AG (PUM, Financial) as well as newer contenders such as Under Armour Inc. (UA, Financial) and Lululemon Athletica Inc. (LULU, Financial) in the athletic-gear marketplace, also revised its guidance for fiscal 2016. Nike now foresees revenues falling in the high single-digit range, compared to the previous guidance of above the mid-teens, while the company expects full-year earnings to come in below its long-term targets. Nike foresees EPS for 2016 to be up by a high-single to low-double digit percentage, while consensus estimates project a 13% rise in EPS to $4.04.
Final thoughts
Nikes reported a mixed bag of results for Q3 2015, with earnings surpassing estimates and revenues falling short of expectations. However, the company’s key woe is the strong dollar that ate into nearly 6% of its overall revenues for the quarter. During the third quarter, Nike bought-back around $612 million worth of shares as part of the company’s four-year, $8 billion buy-back program starting 2013. Consequently, the company has repurchased total shares worth around $5.3 billion as of the third quarter end, at an average cost of $71.13 a share. Experts foresee Nike’s earnings to grow at an average annual rate of $12.5%-13.5% over the next five years with the company ending fiscal 2015 with EPS of around $3.5 a share. Nike shares have surged 24% in the last year and currently carry a ‘buy’ guidance.
