As Sales Disappoint, Nike Tells Investors to Think Long-Term

In the face of rising competition, an ongoing slowdown in North America and consumer shifts, Nike Inc. is asking shareholders to focus on its long-term growth prospects.

Following the release of its third-quarter earnings results Tuesday — which showed sluggish overall sales growth for the firm and negative futures orders — Nike’s management said it will ramp up its efforts in digital and innovation to power through consumer shifts.

“The current backdrop represents a tremendous opportunity for Nike, because the brands that win are going to be the ones that have an out-in-front with digital and lead with service,” Nike president, chairman and CEO Mark Parker said during the company’s Q3 conference call. “While we don’t expect this transition to be simple, we are clear about what it will take to get there. We’re aligning all of our firepower against the consumer experience.” (Specifically, Parker said the company is focusing on a “2x innovation, 2x speed and 2x direct” approach, calling it the “triple-double” strategy.)

After producing multiple quarters of double-digit gains, Nike said its global futures declined 1 percent on a constant-currency basis, and 4 percent on a reported basis. Meanwhile, futures in the challenged North America market declined 9 percent.

“This is Nike’s third consecutive decline in North American futures and its worst decline in over seven years,” Cowen & Co. analyst John Kernan pointed out on Tuesday.

In tandem with weakening futures last September, Nike told investors that it would change how it reports futures results. Instead of reporting futures as a standalone metric in its earnings releases, as it has done, it will now just include them in U.S. Securities and Exchange filings and discuss them on quarterly conference calls with investors.

Futures orders — a calculation of merchandise the company has committed to delivering to retailers over the next six months — are a unique measure for Nike and had long been regarded as a key indicator of its growth. But Nike has signaled that they are becoming less of a barometer for sales.

Providing an early read of its fourth quarter, Nike said it expects to grow revenues at a mid-single-digit pace on a reported basis, and slightly below its Q3 reported rate of growth.

Reiterating a buy rating on the stock today, Susquehanna Financial Group analyst Sam Poser — who also noted that he sees futures becoming a much less reliable predictor of revenue growth — said he believes Nike’s guidance reflects a “whatever can go wrong, will go wrong approach.”

“However, it is evident to us that Nike’s new and existing initiatives will drive earnings upside in coming quarters,” Poser wrote.

For his part, Canaccord Genuity analyst Camilo Lyon noted that while Nike pulled off a significant profit beat — producing earnings per share of 68 cents, compared with consensus estimates of 53 cents — he wasn’t impressed.

“The beat was of low quality as lower SG&A, a lower tax rate and higher other income accounted for all the upside,” Lyon wrote today.

While he noted that Nike’s new strategic initiatives indicate that the company recognizes both digital and competitive shifts, Lyon said he believes the wait-and-see game continues for the firm.

“On one hand, we like the aggressive steps Nike is taking to improve its positioning in the market (increasing speed to market via its express lane initiative, etc.); however, we continue to believe it will take time to turn the business,” Lyon wrote.

Considering management’s posturing, it appears taking a long-term view is the mantra of the day.

Nike shares dipped in after-market trading Tuesday on the heels of its earnings release. As of 12:30 p.m. today, shares remained down more than 6 percent, to $54.37.

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