Nike released its Q3 earnings report after trading closed Thursday, indicating the footwear and apparel powerhouse had surpassed Wall Street expectations for earnings but had failed to reach sales goals—particularly in North America.
In a Nutshell: After closing with a company-record share price of $88.01 on Thursday, after-hours trading brought prices down by more than 4 percent as investors reacted to the somewhat disappointing results. Regardless, a minor selloff is unlikely to place much of a dent in the 19 percent Nike has gained so far in 2019.
Inventories for Nike were at $5.4 billion at the end of the quarter, up 1 percent compared to the prior period. Nike says this slight uptick was a result of “strong demand for key franchises” that required healthy inventory in multiple markets. Its balance sheet was also $705 million lighter than it was during the comparable period in 2018, which it says was a product of a greater number of share repurchases, dividends and investments in infrastructure that “more than offset proceeds from net income.”
Nike repurchased 9.8 million shares in Q3 for $754 million, completing a $12 billion repurchase program that had been in place since 2015. It authorized another four-year $15 billion repurchase plan in June 2018.
Sales: Revenue for Nike Inc. increased by 7 percent in Q3 to $9.6 billion with Nike Brands accounting for $9.1 billion of those sales. The company said revenue growth was driven by gains in both wholesale and Nike Direct, although Nike has made direct-to-consumer more of a priority in recent months with its SNKRS app and the launch of a new 68,000 square foot flagship store on New York City’s Fifth Avenue.
Analysts expectations came in slightly higher at $9.61 billion. However, after posting a revenue loss of 6 percent in North America—Nike’s largest market—in the comparable time frame last year, analysts expected a stronger bounceback. Nike recorded sales of $3.81 billion in North America in Q3, compared to analyst expectations of $3.85 billion.
Revenue for Converse was $463 million in Q3, down 2 percent from the same time last year. The brand has experienced a loss of market share recently, likely due to the rise of Vans, a direct competitor. Nike said double-digit growth in Asian and digital sales was offset by revenue declines in the U.S. and Europe for the brand.
Earnings: Nike has a reputation for surpassing earnings expectations and that held true in Q3. The company posted earnings of 68 cents for the quarter, above the mark of 65 cents set by financial analysts. This was a marked increase over the comparable time frame in Q3 of 2018, as Nike suffered a one-time tax burden from the Tax Cuts and Jobs Act that reduced its quarterly earnings by $1.25, subsequently preventing accurate comparability and leading to a loss of 57 cents.
Nike credits its earnings growth to strong revenue and gross margin expansion, which increased 130 basis point to 45.1 percent thanks to higher average selling prices and favorable changes in currency exchange rates despite higher product costs. Net income was $1.1 billion in the quarter as the brand enjoyed a lower overall tax rate and a fewer number of shares due to its repurchasing program.
Selling and administrative expenses bit into that income, however, increasing by 12 percent to $3.1 billion in Q3. This came about due to a 17 percent increase in operating overhead in the quarter as a result of wage-related expenses incurred by “key transformational initiatives” in its direct-to-consumer capabilities.
CEO’s Take: Nike is fully committed to its growth as a direct-to-consumer brand and Mark Parker, chairman, president and CEO at Nike said the brand’s growth in the digital arena is cause for celebration.
“In Q3, our team once again drove strong, healthy growth across Nike’s complete portfolio,” Parker said in a statement. “Our business momentum is being accelerated by our ability to scale innovation at a faster pace and expand new digital consumer experiences around the world.”
Andy Campion, executive VP and CFO at Nike agreed and added that the brand’s digital growth was strong no matter the region.
“The Consumer Direct Offense is delivering broad-based growth across all four of our geographies, led by continued momentum in China,” Campion said. “We will continue investing in key capabilities to drive Nike’s digital transformation and fuel strong profitable growth into the next fiscal year and beyond.”