Analysts Turn Bearish on Nike

Analysts Turn Bearish on Nike
Mark Parker

Analysts are disappointed with Nike Inc., as the athletic giant expects continued pressure on its gross margin into fiscal 2013.

“The Nike balloon has deflated somewhat,” said Rob Samuels, analyst at The Benchmark Co. “Now growth in China is slowing. All the momentum money that remains heads for the exit.”

Camilo Lyon, analyst at Canaccord Genuity, said, “As we expected, futures orders decelerated, mainly driven by a dramatic slowdown in China. Sales guidance of mid- to high-single-digit growth still looks aggressive, and there is a heightened risk of excess post-Olympic inventory that could further delay the margin recovery.”

Meanwhile, Sterne Agee analyst Sam Poser called the firm’s outlook “troublesome,” as Nike VP and CFO Don Grimes provided lackluster guidance for the coming year.

Grimes told analysts on a conference call that first-quarter gross margin is expected to decline about 100 basis points, while full-year gross margin will end up improving less than previously anticipated due to the impact of significant foreign exchange headwinds.

Selling, general and administrative expenses also are expected to grow faster than revenue, at a high-single to low-double-digit rate.

Nike President and CEO Mark Parker admitted, “We didn’t deliver as much growth to the bottom line as we would have liked [in the fourth quarter]. We faced significant input cost pressures throughout the year.”

He added, “As I look at fiscal 2013, I expect persistent challenges along with big opportunity. We will see continued uncertainty in the global economy; commodities and labor costs will continue to fluctuate; currency pressure is increased, especially in Europe and the emerging markets; and China’s economy is expected to grow more slowly than we’ve seen over the past five years.”

Charles Denson, president of Nike brand, said, “To improve gross margin, we always start with product cost. We have strong mechanics in place like lean manufacturing and sourcing consolidation. We are aggressively leveraging our scale and diversity and we are driving breakthrough innovation like Flyknit that over time will deliver both economic and sustainability benefits.”

Denson added, “The final lever we’re pulling to improve gross margins is pricing. The price-value relationship and brand strength go hand-in-hand.”

Nike brand revenues grew 16 percent in fiscal 2012, driven by running, which was up 31 percent currency-neutral.

“What’s new in running is the rise of digital technology and services. Runners are technology-oriented athletes, who recognize genuine innovation. Digital speaks to them because it helps them train, compete and measure their performance. Digital services can motivate them and connect them to other runners. Today, running is a social activity and digital is helping drive participation rates through the roof all over the world,” said Denson.

Converse revenues advanced 17 percent. Nike also revealed financial information about Cole Haan and Umbro, two brands it is seeking to divest.

Both businesses contributed a combined $797 million to full-year revenue and a $43 million loss before interest and taxes. If both businesses stayed under Nike for the duration of fiscal 2013, they would report a consolidated pre-tax loss of $50 million to $75 million, Grimes said.

In a rare miss, Nike reported lower-than-expected fourth-quarter results on Thursday.

For the three months ended May 31, the Beaverton, Ore.-based athletic giant’s net income fell 6 percent to $549 million, or $1.17 a share, from $594 million, or $1.24, a year ago.

Revenues rose 12 percent to $6.5 billion, on the back of growth across all regions, key categories and product types.

Futures orders rose 12 percent excluding currency changes, which also fell short of the expected 18 percent.

Nike’s stock was trading 8.8 percent lower at around $88.38 per share Friday.

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