While Nike exceeded the consensus estimates proving critics wrong, analyst community is remaining a bit cautious.
Citigroup notes that Nike's top line grew 8.6%.Global futures were up 6.0%, slightly higher than they were expecting. U.S. futures were stronger than expected at 8%.
However, gross margins contracted by 120 basis points due to higher raw materials and mix shifts. Inventories increased another 15% during the quarter, which was significantly above revenues and futures.
Overall, despite concerns in the market, Nike's overall business appears to be healthy. Firm thinks Nike's innovation on both the performance and fashion side will drive growth in footwear and apparel growth will continue to be strong.
Firm thinks the gross margin pressure and higher inventories could be for the short term, especially if Europe and Japan continue to improve.
Merrill Lynch believes the stock is up because US futures were strong and gross margins for August were within management's expectations (versus a recent trend of missing expectations). They think a $5 move in the aftermarket is a little much however, recognizing NKE has been an underperforming name in consumer discretionary.
Firm notes that GMs are now seen flat or below F06 levels, offset by share repurchase. NKE bought back over 2% of its share base, pacing shares down over 5% for the year. Margin pressure is in footwear (oil and labor input cost inflation, higher discounts in the UK and Japan, and product and regional mix shifts). Marketing spend for August was $50mm below firm's estimates, and mgmt expects SG&A up mid teens for November, putting firm's EPS 4c below consensus at $1.14.
Susquehanna says they are becoming increasingly concerned about the inventory build at Nike. 1Q07 marked the third consecutive quarter where the company posted double-digit growth in its inventory position (up 15%), but only a single-digit gain in sales (+7% in constant dollars). While firm believes there are some justifications for the higher inventory levels the company is currently running at, which management noted was partially due to focusing more of its sales efforts on increasing its "at once" business versus the brand's historical reliance on "futures," they believe there is considerable risk the company might be compelled at some period in FY07 to bring its inventory levels more in balance with its sales performance. If this occurs, the resulting promotional activity could have a significant negative impact on the company's gross margin and operating results.
Notablecalls: While Nike did better than expected, it is not enough to silence the critics. Have to agree with both Merrill and Susquehanna: $5 move looks excessive and inventory build is bizarre. Expecting the stock to settle down below the yesterday's afterhours prices today.
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