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Shares of NIKE (NKE- Free NIKE Stock Report) are under pressure today after the athletic footwear and apparel maker announced results for its first (August) quarter of fiscal 2018 (years end May 31, 2018) that were a mixed bag. Revenues fell a tad shy of expectations, due to troubles in the North American market, while earnings beat the consensus estimate, which had come down over the past two months due to both in-house and industry-specific concerns.

Sales for the three-month period clocked in at $9.07 billion, a bit below our $9.10 billion call and only up slightly from the $9.06 billion posted in the previous-year period. Revenue for the NIKE brand was $8.6 billion, up 2% on a currency neutral basis, while sales of Converse fell 16%, to $483 million, due to lower North American receipts. Breaking it down in terms of revenue for footwear, apparel, and equipment, tallies came in at $5.5 billion, $2.7 billion, and $420 million, respectively. Geographically speaking, China-based operations were sound, with a 9% top-line increase, to $1.1 billion, but North American sales were just $3.9 billion, down 3% year over year. Management cited short-term promotional headwinds as the main reason for the dip in domestic sales.

Share net for the August quarter totaled to $0.57, a few pennies ahead of our reduced $0.55 expectation, but well below the $0.73 figure in the fiscal first quarter of 2017. In a highly competitive retail landscape, NIKE is believed to be racking up the expenses, favoring discounts, and funneling sizable sums of money into its direct-to-consumer platform. Efforts to cut costs are in full swing, and we saw the early signs of this in the period, as SG&A expenses were trimmed by 1%, to $2.9 billion. Gross margins also took a hit in the three-month frame, and a higher effective tax rate was an additional burden. In June, a plan was announced to cut 2% of the global workforce and realign geographic segments from six to four: North America; Europe, Middle East and Africa; Greater China; and Asia/Pacific and Latin America.

The NIKE picture is clouded at the moment. Wholesale receipts in North America are on the decline and foot traffic in numerous locations that push NIKE products is down significantly. Already, entities like Dick's Sporting Goods (DKS), Foot Locker (FL), and The Finish Line (FINL) have seen their shares damaged by preannouncing poor customer levels, pricing pressures, and weaker margins. NIKE, in turn, has become more promotional in an effort to move more goods, but whispers of a stale innovative pipeline have damaged the quotation of late. Moreover, Adidas is making meaningful headway towards taking some of the company's market share, particularly in the lucrative basketball sneaker arena. Efforts are being made to cut out the middlemen and go directly to the consumer, which both we and Wall Street applaud, and partnering up with Amazon.com (AMZN) seems like it will be a home run if all goes well. Still, there are fears that the retail environment is shifting so rapidly that NIKE will have issues enacting its turnaround plans.

We are maintaining our previously trimmed top- and bottom-line estimates for the full fiscal year of 2018. Earnings should come in around $2.55 a share, just $0.04 higher than the fiscal 2017 level on a top line of $36.0 billion, roughly a 5% year-to-year advance. The blossoming of the Amazon relationship should be evident as the fiscal year progresses, and the start of the NBA season should give the company a much needed shot in the arm.

From an investment perspective we like NIKE stock from a number of angles. However, we feel the need to caution subscribers on any play in the retail sector at this time. Things are changing, and those that do not adapt will likely suffer. NIKE has a plan, and the financial wherewithal (Financial Strength rating of A++) to execute it to the letter. Additionally, we think the recent decline in share price has created a nice entry point for those seeking appreciation potential three to five years hence. A dividend yield of 1.4% should also help to get some total-return seekers in the game.

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.