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business newsNike's Earnings Run Into Problems
Revenue growth was down 2% in Europe and down 17% in Japan. Under Armour may be a stronger investment in the sports apparel market.
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In premarket trading, Nike was down two points to $70.62. Digging deeper into the quarterly report finds both positives and negatives that investors should be concerned with.
Looking at the positives, Nike’s showing strong revenue growth of 8.5% year over year. Moreover, breaking down revenue growth by market shows strong gains in North America (up 8%), Greater China (up 19%), and emerging markets (up 30%). Nike also said it's seeing strong order growth for athletic footwear and apparel, scheduled for delivery between June and November, totaling $8.8 billion, which is 7% higher than what the company reported last year.
Now let’s look at the negatives of the quarter. Nike’s gross margins were 47.4%, which were lower than what analysts had forecast. Breaking down Nike’s revenue growth by market shows Western Europe down 2%, Central and Eastern Europe down 2%, and Japan down 17%.
This morning Wall Street analysts are out with their opinions of Nike’s quarter. Thomas Weisel sees future consistent growth coming from the company’s strong lines of business. The firm views Nike as a solid core holding and reiterates its Overweight rating.
FBR Capital wasn't as bullish on the athletic company. FBR notes that gross margins were pressured by high raw material costs, foreign exchange rate fluctuation, and rising wages in Asia. FBR maintained its Outperform rating but the company removed it from Top Pick List and placed a price target of $79.
In my opinion, those who want to invest in a sports apparel company could consider Under Armour (UA), whose shares offer more growth and upside compared to Nike. The company has put its footwear disaster behind it and has a strong fall lineup of core football apparel and a new hybrid cotton line launching in the fall; these should act as growth drivers moving forward. Analysts like the company as well; UBS upgraded the stock this morning from Neutral to Buy and placed a $38 price target on it.
From a macro perspective, there are some serious concerns on Nike’s report. As FBR notes, the company was pressured by high raw material costs, FX fluctuations, and rising wages from Asia. This will be something to watch for over the coming weeks as earnings season gets heated up.
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