Currency Headwinds Could Taper Nike’s 1Q18 Margins

What’s in Store for Nike This Quarter? A 1Q18 Earnings Preview PART 3 OF 3

Nike’s 1Q18 EPS to contract 34%

As we’ve already seen, Nike (NKE) will report its 1Q18 results on September 26, 2017. Earnings during the quarter are expected to fall a whopping 34.0% YoY (year-over-year) to $0.48 cents per share. The company’s earnings growth is expected to turn negative for the first time in the last 19 quarters.

Nike reported a 22.4% YoY growth in 4Q17 earnings to $0.60 cents, beating the consensus by $0.10. The company has done better than Wall Street expectations in the last 20 consecutive quarters.

Gross margin contraction and expectations

Nike’s gross margin has deteriorated over the last five quarters. In 4Q17, its gross margin fell 180 basis points to 44.3% of sales, mostly driven by currency headwinds. For fiscal 2017, its gross margin fell 160 basis points to 44.6%.

Management expects another 50-basis-point decline in its reported gross margin in fiscal 2018. However, on a currency-neutral basis, its gross margin is likely to expand beyond the high end of the long-term goal of a growth of 30 to 50 basis points.

For the first quarter of 2018, management has guided the gross margin to contract 150 to 180 basis points. The decline will be anchored mostly by foreign exchange headwinds.

Comparing Nike’s margins to its peers

Nike has recorded a gross margin of 44.6% of sales over the last 12 months (or LTM). That’s lower than most of its sportswear competitors. Adidas (ADDYY), Under Armour (UAA), Columbia Sportswear (COLM), and Lululemon Athletica (LULU) posted LTM margins of 48.9%, 45.8%, 46.6%, and 51.5%, respectively.

ETF investors seeking to add exposure to NKE can consider the ProShares Ultra Consumer Goods ETF (UGE), which invests 2.2% of its portfolio in NKE.

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