Morgan Stanley Calls Nike's Q1 Earnings Beat 'Low Quality,' Sees Guidance As 'Soft'

Morgan Stanley believes Nike Inc NKE skipped the main point of debate on the competitive athletic wear landscape that signified the company ceding market share to adidas AG (ADR) ADDYY and Under Armour UA consistently.

As a result, the brokerage retained its EPS estimates for the current fiscal year and price target of $60 on the company's stock while retaining Equal-Weight rating.

Earnings Report And Analyst's Take

On Tuesday, the company reported net income of $1.25 billion, or $0.73 a share, on revenue of $9.06 billion for the first quarter. Its EPS topped estimates by 30.4 percent and remained the biggest positive surprise percentage in the last four quarters.

Related Link: Attention, Nike Investors: "Reasons For Caution Increase"

However, analyst Jay Sole termed the EPS beat "low quality" and pointed out the soft outlook offered by Nike. He also sees three catalysts to indicate whether the shares could trade better or worse:

• Earnings results from Under Armour in October.
• Earnings results from Adidas in November.
• Nike's second-quarter results in December.

The brokerage pointed out Nike sales could advance only 6 percent in North America in the first quarter compared to 26 percent and 22 percent recorded by Adidas and Under Armour, respectively. The firm pointed out that the company's gross margin miss was the biggest in five years.

In a research note, the analyst said, "Plus, the company reduced its GM outlook for the rest of the year by roughly 120 bps. If US share loss continues, we think it could turn Nike into a low-double-digits EPS CAGR story, resulting in Nike's FY2 P/E contracting to 16x from 20x."

The brokerage pointed out that Nike's sales outside America continued to be robust beating estimates.

At Time Of Writing ...

• Adidas was up 0.7 percent at $86.64.
• Nike was down 1.72 percent at $54.39.
• Under Armour was up 0.51 percent at $39.39.

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