Timid Outlook Catches Nike Investors Flat-Footed

The Company

Nike (NKE)

Share price as of Wednesday's close: $65.97

Share price now: $59.50

Percent change: -9.8%

Volume: 18.4 million shares, daily average 3.1 million

The News

The Beaverton, Ore., company late Wednesday reported fiscal fourth-quarter earnings of 98 cents a share, two cents better than the consensus estimate from Thomson Financial. Nike earned 86 cents a share in the year-ago quarter. Earnings for the fiscal year ended May 31 were $3.74 a share, up from $2.93 the previous year.

The company reported quarterly revenue of $5.09 billion, up from $4.38 billion a year ago. Analysts expected revenue of $4.95 billion, according to Thomson Financial. Full-year revenue was $18.6 billion, up from $16.3 billion.

On a Wednesday conference call, management said marketing expenses for the August Olympic Games in Beijing and the ongoing Euro Cup soccer tournament would cut into results for fiscal 2009.

Nike Chief Executive Mark Parker also warned that "challenges in the U.S. market" would mean the company "can expect economic bumps along the way."

The U.S. markets accounts for about a third of Nike's revenue, and did manage 4% growth in the quarter. The two-thirds of revenue coming from overseas sales remained the area of strongest growth. Sales in the rapidly growing China market topped $1 billion in fiscal 2008, the company said.

Caris & Co. analyst Claire Gallacher on Thursday cut her rating on the stock to Above Average from Buy.

The Analysis

Futures orders for the next six months, a key measurement for analysts, stayed flat in what Thomas Weisel Partners analyst Jim Duffy called "a tough macroeconomic environment." Domestic sales of footwear and performance apparel were offset by a drop in sportswear orders, he wrote in a Thursday note.

And the cost of doing business overseas is getting pricier. According to Duffy, advertising and promotional spending for Euro Cup and the Beijing Olympics will be $100 million more than his estimates, which will cut earnings by 15 cents.

Add the winds of potential economic woes blowing through Europe, and Susquehanna Financial Group analyst John Shanley has reason to be concerned.

"Given the uncertainty surrounding the level of demand creation spending anticipated in 1H09, and the difficult retail environment in the U.S. and several major Western European markets, we believe there is a level of uncertainly surrounding our 1H09 EPS expectations for the company," he wrote Thursday.

Nike didn't offer specific quarterly guidance, but said it expects revenue to increase in the midsingle digits with a slight increase in its gross margins over the fiscal year.

The Bottom Line

Sara Hasan, at McAdams Wright Ragen, noted in an earnings preview published Monday that year-over-year sales comparisons will only get tougher. However, the brand strength has more Nike merchandise at more U.S. retailers, even as domestic consumer spending weakens.

And Nike's global footprint keeps getting deeper and wider. Futures for Europe, Middle East and Africa rose 10% for the same period when domestic orders stayed flat, and Duffy calls China a "long-term, sustainable growth opportunity for Nike," adding that "the company will invest heavily post-Olympics to leverage the strong connection the Chinese consumer has with the brand."

That connection won't come cheap, as the Street has noted, but in a couple of quarters it will be worth looking to see if Nike has resumed its healthy pace.

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