While Nike (NKE) did manage to create continued revenue growth in its fiscal fourth quarter of 2019, some weakness was spotted in earnings due to higher taxes and investments.
Fiscal-fourth-quarter revenues increased 4% year-over-year to $10.18 billion. Excluding currency fluctuations, revenues increased 10%. Gross profits improved 6% year-over-year, while gross margins had an 80 basis-point bump to 45.5%. Nike noted that the increase was due to higher prices, foreign currency impacts, and the continued success of their direct-to-consumer initiatives. The shoemaker added that production costs increased, along with investments in supply chain management.
The sour area within the earnings release was net income. Nike reported net income of $989 million. That's a 13% decline from last year's fiscal fourth-quarter net income of $1.14 billion. Overall, Nike noted that it paid a considerably higher tax rate of 20.4% compared with a rate of 6.4% the previous year. I can see how that would factor into net earnings. But income before taxes only increased 2% to $1.24 billion. Net income growth would have been rather slim either way. These earnings break down to 62 cents per diluted share. That's a 10% decrease year-over-year.
My feelings are mixed for the quarter. The main strength right now is definitely Nike Direct, it direct-to-consumer initiative. Nike Direct revenues increased 16%, on a currency-neutral comparison.
So, were the earnings enough for Nike's stock price? The sports retailer reported both beats and misses on various estimates. Nike reported surprisingly strong revenues, but analysts had expected earnings of 66 cents per share. So the adjusted earnings of 62 cents a share were a little underwhelming.
You can look at it from one of two ways. Nike's earnings were hurt by the increased spending related to the investments it had to make in creating the ability to sell more of its product direct to consumer. As others have pointed out, the fallout of many brick-and-mortar athletic chains created a distribution hole that Nike had to fill on its own. If these investments yield long-term results, then the weaker earnings in the short term are irrelevant, compared to the long-term potential. More than anything, I think it becomes a question of your personal time horizon.
The stock was down about 1% after hours (at the time of writing) this, but it's tough to really call that a strong reaction. I do think that anything retail is susceptible to some form of impact from the ongoing trade war with China. It is unclear whether this is going to resolve itself in a meaningful way. Also, should President Donald Trump win re-election, it's very possible that we could see continued tariff maneuvers against other cheap labor nations as well. Whether you agree with it or not, it's something to keep in mind when looking at stocks like Nike. Analysts have pointed out that a low percentage of Nike's inventory made in China actually gets shipped to the United States.
The catch here is that only 6% of Nike's finished goods are made in the United States. So if they're not shipping in from China, they're shipping in from somewhere like Vietnam, Indonesia or Thailand. Yes, thus far tariffs haven't impacted Nike in a too harsh a way. But if the current administration is willing to place tariffs on China, why wouldn't it do the same to other nations that are perceived as undermining our labor? It's food for thought. Nike continues to do well and invest in the right channels, but the reliance on overseas manufacturing is a still a risk right now. As I said before, it is all about your time horizon and patience.
