It doesn't look like it on the surface, but Nike (NKE) didn't slam-dunk its quarter.
As usual, the Nike fan boys were out in force on Twitter after the company announced its fiscal third quarter results. The reasons for the enthusiasm, as always, were pretty evident.
Sales were strong around the globe. Europe and China continued to show remarkable growth despite slowing economies and general geopolitical unrest. I believe Nike is doing a great job in these regions promoting sport and why people need to pay up to own its newest innovations. In the U.S., most retailers would kill for a 14% sales increase during an election year that is uprooting consumer spending.
As for futures orders, I commend Nike for even continuing to report these figures. They don't have to, and over time I suspect they will stop the practice. But, by and large, Nike continues to defy conventional logic by getting major retailers around the world to give its products sizable room on sales floors despite the rise of competitors such as Growth Seeker holding Under Armour (UA) and the re-emergence of Adidas. Impressive stuff to be sure.
However, as I have often stated, Nike is not a normal company. It reminds me of Apple (AAPL) in many ways, but one way in particular: Wall Street holds outsized expectations for earnings, product launches and general news flow. (Apple is a portfolio holding in Action Alerts PLUS, Jim Cramer's charitable trust.)
I mean, there was Apple's CEO Tim Cook earlier this week unveiling products that likely took a bunch of smart, well-paid engineers years to develop, and will drive sales and profits, and yet the stock market yawned. (I agree with the yawn, by the way, as I think the company has an innovation problem on its hands).
With respect to Nike, it didn't deliver on several fronts, and that's unwelcome news to a stock valued for aggressive growth for the next five years. One always wants more from Nike given the mindboggling amount of innovations the company brings to market literally each week, many of which are supported by high-profile athletes such as LeBron James and Kobe Bryant.
Here are the pain points from the quarter. To me, these are enough to suggest not buying the stock on weakness Wednesday.
Equipment business sales plunge.
This is decent-sized business for Nike, but it continues to be under pressure. I think the absence of Tiger Woods due to injury is hurting Nike's golf equipment business. So is an innovation streak from Calloway Golf (ELY), which I recently came out supporting.
Non-chalance on store closures.
Nike execs said a wave of U.S. department store closures are not hurting its results. Their answer was actually pretty arrogant, in my view. I think store closures from J.C. Penney (JCP), Macy's (M), Sears (SHLD) and others are weighing slightly on the company, and this was reflected in the company's gross profit margins during the quarter.
On the positive side, Nike continues to do wonders online. Sales surged 56% during the quarter.
Mixed outlook for an Olympics year.
Nike tends to bring it's "A+ game" in an Olympics year. I think this will be no different for the upcoming summer games in Rio de Janeiro, which will feature golf and basketball. I wouldn't be surprised if Nike uses the platform to unveil something new on the technology front. I place the probability of a wearable device as low, but not completely out of the question given the buzz Under Armour has generated with its new Healthbox.
Still, Nike only guided to a low teens earnings growth rate for fiscal year 2017 fiscal year 2016 (ending May), slightly missing forecasts for 15% growth. Do I believe in my heart that Nike will do better than expected over the next 12 months? Yes, due primarily to the Olympics, a strong athleticwear cycle that exists globally, and loads of stock repurchases. But the appearance of the company not doing as well as one would think will likely weigh on the stock near term, and fans concerns that it is losing key battles with Under Armour.
Nike basketball is an unknown right now.
Concerns I have had on weak demand for Nike's signature basketball sneakers (LeBron, Kobe, etc.) in North America remain after the earnings call. While Jordan-brand sneakers have remained hot in the U.S., the core basketball business appears to have struggled. Shame on management for not disclosing sales in its North American basketball business, which it often does. I believe this lack of disclosure underscores the point that Under Armour is proving a credible threat in basketball, thanks to Stephen Curry's popularity and Nike's recent stale designs in basketball. And that is causing the company to liquidate product in the off-price channel and its factory stores, which it hinted at on the earnings call.