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. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.