Current Nike Inc (NKE) Fundamentals Are Lagging Following FQ2 Earnings, Says Erinn Murphy

Piper Jaffray's Erinn Murphy believes Nike's narrative may be getting better, but with less-than-stellar fundamentals, she still bets on downside potential for the company.

Nike Inc (NYSE:NKE) set loose its second fiscal quarter print for 2018 after yesterday’s bell tolled, and while the athletic retailer giant may have outclassed on both earnings and sales, the North America business continues to be the company’s Achilles’ heel. As such, investors are overlooking the beat, unfazed by Nike’s gross margin improvement, instead keyed into NA sales that slipped 5%. Shares are stumbling close to 3% in pre-market trading today.

Piper Jaffray analyst Erinn Murphy believes the company’s fundamentals are dragging the potential for Nike’s overall story, even as the analyst commends international strength and accelerating direct-to-consumer (DTC) endeavors.

In reaction to a print where “narrative remains ahead of fundamentals with another quarter set below,” the analyst reiterates a Neutral rating on NKE stock. However, though Murphy bumps up the price target from $58 to $59, even the analyst’s boost in confidence still implies a 6% downside from current levels. (To watch Murphy’s track record, click here)

For the second fiscal quarter, Nike posted EPS of $0.46, which beat out the Street’s expectations calling for $0.40. Gross margin was down 120 basis points (bps), but considering the Street had projected -180 bps, Nike once again topped estimates, along with an outclass in worldwide revenue. The company reaped a “slight” advantage from a tax rate benefit. Top-line rose quarter-over-quarter across all international regions, with Nike’s segment in Europe, the Middle East, and Africa (EMEA) handing over its highest growth rate seen in “at least” five quarters, Murphy cheers. The analyst attributes this partially to better promotional levels coupled with repricing seen in EMEA.

Yet, North America business hovers as the sore part of Nike’s solid quarter, coming up short of expectations with revenue at -5% against the Street’s -3.2%. Though North American apparel trends did better quarter-over-quarter, footwear meaningfully took a fall to -7%. Worthy of note, the back half of fiscal 2018 looks to realize less severe downward turns in the region than in the first half of fiscal 2018, as Murphy notes “the largest innovation push ever hits the market in late Q3 before scaling in Q4.

Overall, “We are adjusting our estimates & inching up our PT following NKE’s Q2 report. While GM was better (down 120 bps), NA sales declined -5%–consistent with our estimate and a Q/Q deceleration. Q3 was set below expectations as GM pressure will intensify vs. Q2. To wit, GM was guided down 125-175 bps vs. our -40 bps estimate. Our Q3 EPS moves from $0.69 to $0.47. While we can understand the improving Nike narrative (better innovation & an effort to clean up the NA landscape), we see the current fundamentals as lagging this narrative. With a shortage of consumer names to own with durable, longer-term characteristics, Nike screens well given its DTC & int’l growth pillars. As such, this Q2 earnings report likely doesn’t cause existing shareholders to sell but we expect new money to look for pull backs given shares are trading 26x our FY19E EPS,” Murphy contends.

TipRanks highlights a predominantly cautious Street that leans more towards the bulls than the bears on the sidelines. Out of 26 analysts polled in the last 3 months, 11 are bullish on Nike stock while 15 remain sidelined. This begs the question: is the stock an overvalued or undervalued consumer goods player on Wall Street? Keep in mind, the 12-month average price target stands at $62.60, marking a 3% downside from where the stock is currently trading.

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