Nike misses earnings estimates, opportunity knocks

They really are brutal when it comes to earnings misses in the US. They don't have a trading update system like we do here but I guess they do release results quarterly compared to our 6 month releases. But any surprise normally brings big share price movements be it up or down. After hours yesterday Nike released Q4 results which actually looked good but missed expectations. The stock was down 12% in after market trade. Ouch. Let's delve into the numbers.


For the quarter, revenues were up 12% to $6.5bn, the biggest quarter in Nikes history. Earnings per share were down 6% from last quarter to $1.17. Expectations were for $1.37, this is why the share has dropped so much. We will deal with the reasons later. For the fiscal year, revenues came in at $24.1bn while earnings for the year equated to $4.73. That puts Nike on a high historic valuation of around 20. Gross margins for the year declined 150 basis points to a still very healthy 42.8%.


So why did we have this earnings miss? It looks like most of the criticism came from margins being crimped. I feel like I have seen this before. Last year the Amazon share price plummeted when margins were cramped because the company was looking further ahead than just quarterly results and were investing heavily. The Amazon price is now well above those levels.


The same thing has happened at Nike. This has been a big year for sporting events with the Euro football and the Olympics. This requires huge marketing costs. Demand creation expenses increased 23% to $760 million driven by these marketing requirements. Unfortunately neither Spain nor Italy are sponsored by Nike. Regardless, these expenses will take effect this last fiscal year but the sales will be felt in the following year.


There was also a slowdown in China for the quarter but still an 18% growth in the region for the year. Again, a clear indication that this last quarter was tough for everyone. On top of these issues Nike have had a big year in terms of innovation which of course requires capital expenditure. This includes new apparel, footwear and tech offerings. All this new apparel has also resulted in a big inventory expansion which also hampers margins.


In terms of prospects this from their release. "Fiscal year 2012 demonstrated NIKE, Inc.s greatest strength - innovation. We delivered an amazing number of game-changing products and services that drove record revenue growth," said Mark Parker, President and CEO, NIKE, Inc. "We also delivered solid profit growth for the year despite some headwinds in a challenging global economy, which will continue into the next year. That said, NIKE is well positioned to remain aggressive, flexible and laser-focused on the high-growth opportunities. That's how we continue to deliver long-term profitable growth for our shareholders."


We continue to like the theme and the company who are at the forefront of sport apparel. Sport gets bigger and bigger as it satisfies our natural competitive instincts while we try and embrace a healthier lifestyle. This is true for developing markets too. We will use this drop in share price as a big buying opportunity.