Nike Inc. (NKE, Financial) announced mixed fiscal third-quarter 2017 results on March 21, beating analyst estimates on the earnings front while missing estimates on the revenue front. Nike’s struggles in the United States continued well into the fourth quarter, and a resurgent Adidas (XTER:ADS, Financial) and overall weakness in the world’s largest market has only made things worse for the company.
The company reported earnings per share of 68 cents and revenues of $8.43 billion, while Wall Street analysts were expecting the footwear maker to report earnings per share of 53 cents and revenues of $8.47 billion. While revenue for the quarter increased 5%, revenue from U.S. sales grew only 3%. With nearly half of its overall revenues coming from this market, the slow growth dragged its revenue down along with it.
Nike's competitor Under Armour (UA, Financial) was not very far off either, reporting $1.07 billion in revenues from the U.S., a growth of 5.9% compared to the prior-year period. Under Armour and Nike both draw a major portion of their revenue from the U.S, and both companies are growing far slower in this market compared to their own respective growth rates in the past.
The weakness for Nike looks set to continue for some time as future orders, a very important metric that tells the level of demand for its product in the market, was down 4%.
According to a CNBC report, “Nike said its worldwide orders for delivery, a demand gauge it calls 'futures orders,' fell 1% on a currency-neutral basis. Analysts on average had expected it to rise 3.5%, according to research firm Consensus Metrix. On a reported basis, futures orders fell about 4%.”
A 5% growth rate would be a good one to have in most industries, but the footwear and apparel market has been growing at steady pace over the last five years and the expectation was, naturally, high. Nike was planning to add another $20 billion in revenues over the next few years, while Under Armour kept doubling its revenues on a regular basis. Both companies have plenty of room to keep expanding in the international market.
The problem is, both companies are still dependent on the U.S. for the bulk of revenues, and things are not going as smoothly in this market as they had both hoped. Adidas, meanwhile, has steadily been gaining market share, putting both Under Aromour and Nike under pressure, pushing them reassess their own growth plans. The struggle in the U.S. may force both companies to bring their focus back to their home market.
The short-term prospects for Nike do not look all that bright. Future orders are down, the growth rate in the U.S. has declined to low single-digits and the forecast for the next quarter is not up to expectations.
The good news for investors, however, is the stock is going to remain under intense pressure over the next several quarters. Nike is currently trading at 22 times earnings and 2.6 times sales. Despite its current struggles, the company will survive the competition and keep growing for several decades to come. If you want to buy Nike for the long term, this is your chance. I am betting there will be more opportunities like this one in at least the next four quarters.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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