Nike's Q3 Has Been Impressive, Despite Strong Headwinds

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Mar 23, 2015

The apparel and footwear giant Nike Inc. (NKE, Financial) reported mind-boggling third quarter numbers that ended on February 28. Analysts and investors were excited about the posted number mix and the stock market took the news on a positive note sending Nike’s stock higher than expected after the earnings release. Let’s quickly jump into the quarter highlights to find out why Nike remains a top investment choice for its investors.

The outperforming quarter numbers

Despite the presence of headwinds in North America such as unfavorable weather during the winters and shipment delays due to labor strife at U.S. West Coast ports, Nike managed to give an Olympian performance when it came to the third quarter numbers. Interestingly, in North America where the apparel and footwear market is currently facing intense headwinds, Nike has reported a jump in sales that increased 6% with future orders having jumped 15% in the continent. The sales improvement in North America was mainly attributed by rise in sales in the footwear segment of Nike for the quarter.

During the earnings call, Nike President and CEO Mark Parker stated, “Our strong third-quarter results show that our growth strategies are working, even under challenging macroeconomic conditions…”

But challenges such as the strong dollar led to limited increase in quarterly sales for Nike, not to the extent expected by the Wall Street analysts. The sports apparel retailer reported revenue of $7.46 billion, versus analysts’ projection of $7.62 billion, for the quarter. However, the revenue did jump 7% when compared on a year-over-year basis with sales at the Nike and Converse brands improving 11% and 33%, respectively, on a currency-neutral basis.

Remarkably, the “other” line of business showed a bounce-back from a $45 million loss reported a year ago to a gain of $5 million for the quarter, thanks to the favorable currency hedging results. Net income improved 16% to $791 million while diluted earnings grew 19% to $0.89 per share. The net income increase was attributed to the strong growth in revenue and the gross margin expansion by 140 basis points during the quarter. It is to be noted that, unlike revenue that missed meeeting the analysts’ expectations, the diluted EPS surpassed the Reuters analysts’ consensus by $0.05 per share for the quarter.

Future order count looks solid

The firm confirmed during the earnings presentation that orders for Nike brand shoes and clothing that were scheduled for delivery from March to July 2015, or in other words, the worldwide “future orders” recorded a jump of 11% during the quarter. This, however, did not include the impact of currency fluctuations. This future order count of Nike does look impressive against the global future order expectations set by analysts that was expected to rise about 9.9% (excluding currency changes), according to estimates by Consensus Metrix.

Including the impact of the currency changes, worldwide future orders for Nike Brand athletic footwear and apparel scheduled for delivery from March-July 2015 at the end of the quarter increased just about 2% from that reported for the same period a year ago. Hence, in the choppy athletic footwear and apparel market, Nike reported improvement in future order count at the end of the quarter, and this is something that could lead investors to rejoice.

Share repurchase continues to reward investors

During the third quarter, Nike repurchased a total of 6.5 million shares for around $612 million, as part of the $8 billion program approved by the Board in September 2012. By the end of the quarter, a total of 74.1 million shares have been bought back from investors under the stated program for approximately $5.3 billion. Such share buyback schemes are often appreciated by the investors who consider such repurchases as a cherry being offered to the investor community by the company for keeping them satisfied. This also reflects upon Nike’s interest in improving the shareholder value in the long run.

Moving ahead

Since the currency headwinds are estimated to stay in the upcoming quarter as well, Nike’s management have taken a cautious stand and have lowered their fiscal fourth quarter earnings estimate by a penny a share, to $0.83 a share, which would however mark an improvement of 6% over the EPS reported in the fourth quarter of the previous year. Also weak macroeconomic conditions and political volatility mainly in Eastern Europe, North Africa and the Middle East, might present further hurdles depressing Nike’s sales growth in the upcoming quarter. But as the company outperformed such existing challenges in the third quarter, analysts are predicting better sales in the fourth quarter as well. Investors are confident of the company doing well in the upcoming quarter, and we need to stay tuned and keep a close watch on how Nike brand performs during the fourth quarter of the fiscal year 2015.