Nike Earnings: What Happened

NKE gross margin exceeded expectations

Key Takeaways

  • EPS was $0.95 vs. the $0.41 analysts expected.
  • Revenue was higher than expected.
  • Gross margin exceeded analysts' expectations.
  • Nike's digital channels experienced rapid growth.

What Happened

Nike's quarterly earnings, revenue, and gross margin were all higher than forecast by analysts. Despite still experiencing YOY declines in physical retail traffic due to the COVID-19 pandemic, Nike's quarterly earnings grew compared to the year-ago quarter. Revenue declined slightly and gross margin fell YOY but was up compared to the previous quarter. Nike's first quarter performance was driven by strong sales growth in Nike's digital channels.

(Below is Investopedia's original earnings preview, published September 21, 2020.)

What to Look For

Nike Inc. (NKE), the world's leading athletic apparel company, is among the many retailers and consumer products companies hurt by the COVID-19 pandemic. Temporary store closures decimated Nike's sales and earnings in the company's fiscal fourth quarter ended May 31, 2020. While many of Nike's stores have since reopened, the negative impact of the pandemic on the economy will continue to affect its business.

Investors will be assessing the impact of store re-openings on the company's financial results when Nike reports earnings on September 22, 2020 for Q1 FY 2021. Analysts expect both revenue and earnings per share (EPS) to fall sharply compared to the year-ago quarter.

Investors will focus on Nike's gross margin, a key metric for gauging the retailer's operational efficiency. Analysts are forecasting gross margin will rebound from last quarter's steep decline, but expect it to still be down compared to the same three-month period a year ago.

Despite Nike's financial challenges, its stock has managed to outperform the broader market by a wide margin. After cratering with the rest of the market earlier this year as fear over the coronavirus mounted, Nike share's have rebounded and pushed to new highs. The company's stock has posted a total return of 31.5% over the past 12 months, well above the S&P 500's total return of 10.4%.

One Year Total Return for S&P 500 and Nike
Source: TradingView.

Nike's stock has swung sharply even after its rebound in the latter half of March. One of the stock's biggest retreats was in late June after the company reported its Q4 FY 2020 results that badly missed analysts' expectations. Nike posted its first quarterly loss in at least 16 quarters, losing $0.51 a share compared to a profit of $0.62 a share in the same quarter a year earlier. Revenue was down 38.0%, marking the first revenue decline in at least four years.

Nike said that approximately 90% of its stores were closed for about eight weeks in most global locations during Q4 in North America, Europe, the Middle East, Africa, Asia Pacific, and Latin America. This does not include Greater China. While the retailer's online digital sales increased 75% during the quarter, they still comprise only 30% of total revenue.

The company said in late June that approximately 90% of its stores were open worldwide. Nike's stock traded sideways for about a month following the report and began to significantly outpace the rest of the market in early August. Despite this, analysts have a sober outlook for Q1 FY 2021. They expect EPS and revenue to decline 52.4% and 16.3%, respectively.

Nike Key Metrics
  Q1 FY 2021 (estimate) Q1 FY 2020 (actual) Q1 FY 2019 (actual)
Earnings Per Share $0.41 $0.86 $0.67
Revenue (B) $8.9 $10.7 $9.9
Gross Margin 42.7% 45.7% 44.2%

Source: Visible Alpha

Aside from earnings and revenue, investors will also be intently focused on Nike's gross profit margin, also called gross margin. This key metric reflects gross profit, which is sales minus cost of goods sold, as a percentage of total sales. A company can increase its gross margin by either increasing sales or cutting costs, or a combination of both. Amid a slumping economy, when companies generally experience falling sales, they must find ways to cut costs in order to maintain profit margins.

Nike's gross margin fell more than 8 percentage points to 37.3% in Q4 FY 2020, compared to the same quarter a year ago. Prior to Q4, Nike's gross margin ranged between 43% to 46% over the past several years. The company attributed the fourth quarter's drop in gross margin to factory cancellation charges, increased inventory obsolescence reserves, and supply chain fixed costs on lower wholesale shipments, all of which were mostly due to COVID-19 impacts. Analysts expect Nike's gross margin in Q1 FY 2021 to be 42.7%, better than Q4, but down about 3 percentage points compared to the year-ago quarter and below its historical range over the past few years.

Article Sources
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  2. Yahoo! Finance. "NIKE, Inc. (NKE) Analysis."

  3. Visible Alpha. "Financial Data."


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