The following commentary was originally sent to Trifecta Stocks subscribers on March 23, 2016, at 9:55 a.m. ET.
Athletic apparel and footwear giant Nike (NKE) reported its quarterly results last night. They were mixed, with a better-than-expected bottom line offset by a revenue miss; the company's outlook was softer than expected. (Nike is a bullpen name in TheStreet's Trifecta Stocks portfolio.)
Nike's shares opened lower today as Wall Street digested the results. From our Trifecta portfolio perspective, we will be using revised expectations calling for revenue growth and margin expansion that will be slower than previously expected to re-evaluate a potential entry point at or near $55 to $56. We would also note continued currency headwinds reported by the company and we expect to be hearing more about this in a few weeks, when March-quarter earnings kicks into gear.
More specifically, Nike reported February quarter earnings of $0.55 per share vs. the expected $0.48 per share on revenue of $8.03 billion, which came in at the lower end of guidance and below expectations of $8.2 billion for the quarter. The $0.07 per share EPS beat was primarily aided by a lower tax rate (16.3% vs. a year-ago 24.4%) and expense management.
In our view, this was a low-quality earnings beat. By brand, Nike revenues for the quarter were $7.6 billion (up 15% ex-currency), with Converse revenue at $489 million (down 5% ex-currency). Hammering home the impact of currency, futures orders worldwide for branded footwear/apparel were up 12% year over year (up 17% ex- currency) vs. expectations for 15% for better.
Paired with the increase in inventory, some of which reflects new products coming to market as alluded to by Dick's Sporting Goods (DKS) and Foot Locker (FL) as well as share gains in footwear by Under Armour (UA), we see investors taking a cooler view on NKE shares near term. (Foot Locker is part of TheStreet's Trifecta Stocks portfolio. Under Armour is part of the Growth Seeker portfolio.)
Adding to this view, based on the company's initial fiscal 2017 forecast, sales will need to accelerate in the out years to achieve Nike's 2020 target of $50 billion revenue growth. Given the quarter's performance, we see that raising more questions that will keep investors on the sidelines near term, given the high correlation between Nike's revenue and its share price.
We will keep NKE shares in the Trifecta bullpen and look for a better match between the share price and upside to be had, as near- and medium-term expectations get reset.
-- Robert Lang contributed to this report.