Nike’s Q4 2019: Earnings Miss Due To Currency Headwinds And Higher Cost; Outlook Remains Positive
Nike ( NKE ) released its Q4 and FY 2019 financial results on June 27, 2019, followed by a conference call with analysts.
Nike report ed revenue of $10.2 billion in Q4 2019, marking a growth of 4% over $9.8 billion in Q4 2018.
For the full year, revenue came in at $39.1 billion in FY 2019, which was 7.5% higher on year-on-year basis.
Higher revenue was driven by growth across NIKE Direct and wholesale, key categories including Sportswear, Jordan and Running, and double-digit growth across footwear and apparel.
The company reported diluted earnings of $0.62 per share in Q4 2019, lower than $0.69/share in the year-ago period, driven by higher gross margins, offset by currency headwinds, higher administrative and marketing cost, increased overhead expenses, and a higher effective tax rate.
Full year earnings came in at $2.49/share in FY2019, registering a significant improvement over FY2018, driven by higher gross margins, lower tax outflow, and a lower average share count.
NKE reported total revenue of $36.4 billion in FY 2018. The key revenue segments are as follows:
Footwear: $22.3 billion in revenue in FY 2018 (contributed 61% of total revenues). The division is involved in the design, development, and marketing of footwear worldwide under the Nike brand.
Apparel: $10.7 billion in revenue in FY 2018 (contributed 29% of total revenues). The segment sells sports apparel and accessories in several sports categories, sports-inspired lifestyle apparel, and athletic bags under the Nike brand.
Equipment: $1.4 billion in revenue in FY 2018 (contributed 5% of total revenues). This segment includes sale of bags, socks, sport balls, eye wear, timepieces, electronic devices, bats, gloves, protective equipment, and other items.
Other Business: $2 billion in revenue in FY 2018 (contributed 5% of total revenue). This segment includes Converse Inc., which is Nike’s wholly-owned subsidiary that sells sports footwear and has built its reputation as America’s original sports company, and licensing revenues.
A] Revenue Trend
Nike’s footwear segment successfully added close to $400 million to its revenue base, as its segment revenue increased from $6.1 billion in Q4 2019 to $6.5 billion in Q4 2019, driven by growth across all categories, higher growth in unit sales, as well as average selling price (ASP) per pair.
Continued revenue growth in NKE Kids and running categories is expected to drive revenue growth through FY 2020.
Though apparel revenue increased marginally on a sequential basis and remained almost flat on y-o-y basis in Q4 2019, for the full year segment revenue increased by almost $800 million led by the Sportswear category and higher unit sales.
With increased focus on the direct channels, apparel growth is expected to continue over the next year.
Equipment revenue has been sluggish over the last three quarters, with segment revenue remaining almost flat y-o-y in Q4 2019.
Since most of its equipment is manufactured in China, the US-China trade tensions have adversely affected the category.
Other business revenue declined by about $60 million (y-o-y) in Q4 2019, driven by a drop in Nike’s licensing revenues and lower revenues from Converse in Europe and US.
Licensing revenue drop is expected to keep the segment revenue pressured in the near term.
B] Expense and Profitability Trend
Total expenses increased on a y-o-y basis in Q4 2019, due to higher input costs, marketing expense, forex losses, and higher tax outflow.
Cost of Goods Sold (COGS): Cost of sales as a % of revenue was lower at 54.5% in Q4 2019 compared to 55.3% in the year-ago period, driven by higher average selling prices and growth in NIKE Direct, partially offset by higher product costs and supply chain investments.
Demand Creation Expense: Demand creation expense increased marginally by about $30 million in Q4 2019 over the previous-year period, driven by global brand campaigns and key sports moments. NKE’s focus on brand building and related expenses could lead to higher costs over the next year.
Effective Tax Rate: Effective tax rate saw a significant rise in Q4 2019 due to adjustments related to TCJ Act in the previous year period. However, for the full year, the effective tax rate was much lower due to reduction in the statutory tax rate in the US.
Net income margin of 9.7% in Q4 2019 was lower than 11.6% in Q4 2018, led by a higher effective tax rate, increased marketing and overhead costs, currency headwinds, partially offset by higher gross margins.
Full Year Outlook
Trefis estimates that Nike’s total revenues could grow by close to 7% to $41.8 billion in FY 2020.
Higher revenues are expected to be driven by a pickup in North American demand and higher international sales, increased focus on brand building and direct sales channels, higher unit sales and ASP in the sportswear – apparel and footwear category, partially offset by sluggish equipment sales and lower licensing revenues.
After a sharp rise expected in net income margin in 2019 (led by a lower effective tax rate), margins are expected to improve further to 11.4% in FY 2020, driven by favorable price mix and an increasing share of digital sales.
Trefis has a price estimate of $89 per share for Nike’s stock.
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