Goldman Sachs Says Not To Focus On Nike's Weak Futures

Lindsay Drucker Mann of Goldman Sachs urged investors not to give too much weight to Nike Inc NKE’s weak futures reports for North America and cooling in other markets.

Why Futures Aren't Great Metrics

For the second quarter, Nike’s futures growth slowed to 2 percent ex-FX (from +7 percent in the August quarter) and the teens-to-20 percent growth rates reported across last fiscal year. In North America, futures fell 4 percent.

The analyst, who was impressed by Nike’s $0.07 EPS beat on cost controls, does not view futures as a great metric to judge the business as it was disconnected from sales for some time.

“The upbeat sales guidance in N Am in particular is a stronger signal in our view than the futures. This pattern of stronger sales vs futures was apparent during China’s turnaround in FY14–15,” Drucker Mann wrote in a note.

For FY 2017, Nike still expects FX-neutral sales growth of up high-single to low-double digits, and reported revenues up high-singles. That said, the company expects decline in gross margins this year on off-price product liquidation in the U.S. marketplace.

It's A Buy

Drucker Mann, who has a Buy rating on Nike shares, expects EPS of $2.26 in FY 2017 and cut her 2018 estimate to $2.45 from $2.51 on forex headwinds.

On the inventory front, the analyst believes Nike is now roughly six quarters into a domestic inventory reset.

However, Drucker Mann is not ignoring stiff competition from adidas AG (ADR) ADDYY and Under Armour Inc UAA. Over the last four quarters, the adidas brand has grown at an average clip of more than 25 percent in the United States, while Under Armour’s footwear business has surged 60 percent.

But, Nike is confident that the domestic business has tilted towards a “pull” market where demand is outstripping supply of product in the marketplace.

Shares of Nike closed Tuesday’s trading at $51.79. In the pre-market hours Wednesday, they gained 1.41 percent to $52.52. Drucker Mann cut her price target by $1 to $61.