Brean Capital analyst Eric Tracy‘s enthusiasm on Nike Inc (NYSE:NKE) is “somewhat muted” after the athletic retailer giant posted a “mixed” fiscal second-quarter print on Tuesday. Therefore, even noting an earnings beat, he remains sidelined on NKE on back of his lack of confidence in the company’s innovation pipeline as well as a cautious attitude on the company’s near-term prospects.
For the fiscal second quarter of 2017, NKE yielded EPS of $0.50, outclassing both consensus and the analyst’s expectations calling for EPS of $0.43, as well as revenue growth of 6.4% that outperformed the analyst’s revenue forecast of 4.7% and consensus of 5.3%.
However, the analyst believes when looking at the bigger picture, the strong performance cannot be viewed out of context when considering material SG&A leverage of -270bps year-over-year compared to his model of -50bps and global market (GM) headwinds that rose beyond expectation to -140 bps when compared to the analyst’s model of -110pbs. From Tracy’s perspective, this reveals a sustained “drag” resulting from foreign exchange (FX), a surge in product costs, combined with a conglomeration of off-price sales.
Looking ahead, Tracy speculates, “Given ongoing market reset in North America (NA futures growth -4%, even as we acknowledge rev growth should increasingly outperform) and 3Q guidance for revs ‘squarely’ +MSD, we don’t think FY17 guidance for revs +HSD are entirely de-risked.”
Predominantly, the analyst highlights two key concerns: guidance that assumes an acceleration in revenue will hit come fourth-quarter as well as his “continued belief that relatively tepid innovation pipeline places onus on evolutionary platforms like VaporMax/ retro product to sustain growth amid later stage athleisure cycle.”
Tracey’s optimism on the giant’s long-term prospects takes a subdued turn when considering a near-term story with less cause for enthusiasm, as the analyst surmises, “Taken w/ upside NT EPS catalysts that we view as limited beyond lower quality SG&A/ repurchase levers, we believe risk/reward remains relatively balanced at current levels, even as we maintain our enthusiasm for the LT story (including mix shifts towards DTC/int’l, Man Rev levers, top down design focus).”
In reaction, the analyst tweaks his estimates, forecasting EPS of $2.30 for the financial year of 2017 and EPS of $2.58 for the financial year of 2018. Tracy reiterates a Hold rating and a fair value of $52, which aligns with current levels.
According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, four-star analyst Eric Tracy has a ranking of #473 out of 4,289 analysts. Tracy has a yearly average return of 6.9% and a success rate of 52%. When recommending NKE, Tracy earns 1.1% in average profits on the stock.
TipRanks analytics show NKE as a Buy. Out of 28 analysts polled by TipRanks in the last 3 months, 17 are bullish on Nike stock, 10 remain sidelined, and 1 is bearish on the stock. With a return potential of 18%, the stock’s consensus target price stands at $61.67.