NIKE (NKE - Free NIKE Stock Report) got off to a decent start in fiscal 2017 (year ends May 31, 2017). August-quarter share earnings of $0.73 were well ahead of our estimate of $0.55 and the year-earlier tally of $0.67. Sales increased 8%, year over year, or 10% on a currency-neutral basis. The world's largest athletic apparel and footwear supplier achieved double-digit growth in Greater China, Japan, and throughout Europe, while sales in the more-mature North America market gained 6%. Growth likely benefited from an active global sports scene, including the summer Olympics, and new products. The gross margin, though, declined 200 basis points, driven by unfavorable currency changes, a shift in some expenses to cost of goods sold, and a higher off-price mix as NIKE exited the golf equipment business. Marketing expenses were up 25%, reflecting participation in several key sports events. Operating overhead expenses increased 6%. Other income doubled to $62 million, helped by foreign currency exchange gains. The earnings comparison also benefited from a lower effective tax rate (a one-time gain) and share repurchases made over the past 12 months.
Investors were disappointed in the order rate, however, and that is taking a modest toll on the stock in early dealings so far today. As of August 31st, worldwide future orders for delivery through January were up 5% on the same day a year earlier (7% excluding currency changes). That is a deceleration from a 12% increase at the close of the February period and an 8% gain at the end of May. The trend may well reflect an intensifying competitive landscape. Meantime, inventory increased 11%, although, NIKE brand wholesale units were only up 3%, with the balance of the gain due to higher product costs and growth in retail direct businesses.
Despite the $0.18-a-share beat on our fiscal first-quarter earnings estimate, given the tough apparel and shoe environment, we are only tacking a nickel onto our full-year 2016 call, which now stands at $2.40. As of this writing, NKE is the worst year-to-date price performer on the Dow Jones Industrial Average. Conservative investors may want to consider the issue as a long-term holding.
About The Company:NIKE, Inc. designs, develops, and markets footwear, apparel, equipment, accessories, and services. It sells products to retail accounts, through NIKE-owned retail stores and the Internet, and through a mix of independent distributors and licensees in approximately 190 countries. Subsidiary brands include Converse casual sneakers and Hurley lifestyle apparel and accessories.