After the closing bell on June 25, Nike Inc. (NKE, Financial) reported the earnings results for its fourth quarter of fiscal 2020, which ended on May 31.
Ahead of the earnings release, the stock rallied approximately 3% for the day to close at $101.40 as some analysts increased their price targets on high optimism for digital sales.
Shares dropped approximately 4% to trade around $97 apiece in after-hours trading following the news that the company missed analyst estimates on both revenue and earnings per share.
Earnings highlights
For the quarter, revenue came in at $6.3 billion, representing a 38% decline from $10.1 billion in the prior-year quarter. The company recorded a net loss of $790 million, or 51 cents per share, compared to net income of $989 million and EPS of 62 cents in the prior-year quarter. Analysts polled by Bloomberg expected revenue of $7.4 billion and EPS of 10 cents, while Zacks consensus estimates called for revenue of $7.2 billion and EPS of 2 cents.
The usual culprits, Covid-19 and the resulting lockdown and social distancing measures, were responsible for most of the decline due to store closures and increased unemployment.
The gross margin declined 820 basis points to 37.3% due to increased inventories, factory closures and other costs associated with the pandemic crisis, which were partially offset by a greater percentage of items being sold at full price online.
As of the end of the quarter, 100% of Nike’s stores in the Greater China region have re-opened, while 85% of locations in North America, 90% of locations in Europe, the Middle East and Africa and 65% of locations in Asia Pacific and Latin America are operating under full or reduced hours.
One bright spot was increasing digital sales. Nike’s focus on digital was one of the main reasons analysts cited for upping their earnings estimates, and while the segment didn’t quite deliver the spectacular save some were expecting, the company did see its digital sales increase by 75% during the quarter (79% on a currency-neutral basis). Matt Friend, the executive vice president and chief financial officer for Nike, commented the following:
“As physical retail re-opens, NIKE's strong digital trends continue, a testament to the strength of our brand and the investments we've made to elevate digital consumer experiences. Amid macroeconomic uncertainty, we will continue to operate with agility, focused on optimizing marketplace supply and demand, cost management and leveraging our financial strength to drive long-term sustainable, profitable growth.”
For full fiscal 2020, total revenue fell 4% to $37.4 billion. The Greater China segment actually experienced an 8% increase in revenue compared to fiscal 2019, while digital sales increased 47% for the year. Net income was $2.6 billion, or $1.60 per share, representing a 36% decline from the prior year.
Valuation
GuruFocus gives Nike a financial strength rating of 7 out of 10, a profitability rating of 9 out of 10 and a valuation rating of 1 out of 10.
As of the quarter’s end, the company’s cash on hand and cash equivalents totaled $8.8 billion, which is $4.1 billion higher than the prior-year quarter after the company issued $6 billion worth of corporate bonds in March. Combined with the debt of $3.4 billion at the end of the previous quarter, Nike now has approximately $9.4 billion in debt.
As of June 25, Nike trades with a price-book ratio of 17.84 (lower than 99.27% of competitors) and a price-sales ratio of 3.94 (lower than 88.47% of competitors). According to the Peter Lynch chart, the stock is trading above its intrinsic value.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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