Basketball Segment Slips, But Nike Still Has Long-Term Growth Ahead

Despite Nike Inc NKE having faced several headwinds, Baird’s Jonathan R. Komp maintains an optimistic stance on the company, stating that Nike is “taking appropriate steps to drive better performance in upcoming quarters” and that the stock continues to be attractive, “given healthy long-term growth characteristics.”

Komp maintains an Outperform rating on the company, with a price target of $67.

Some Slips

Based on Nike’s 10-Q filing for FQ2:17, the analyst mentioned that the company’s inventory position was improving, although there still were some areas of concern.

The 9 percent increase in inventory globally in FQ2 was primarily driven by higher average cost, rather than unit growth, while wholesale inventory units only rose 1 percent.

With regard to category, Komp that while the company had “declared that basketball is back going forward, Nike Basketball footwear was negative globally in FQ2 as a decline in North America offset growth in China.”

In addition, Global Football footwear had delivered a negative performance during the quarter in Western Europe, Central and Eastern Europe, and Japan.

Some Gains

Total China sales grew 17 percent, ex-FX, although growth in the country remained below 21 percent in FQ1 and included a 3 percent decline average selling price (ASP) for footwear for the second successive quarter.

On the other hand, gross margin improved, expanding 80 bps, although the increased off-price mix continued to be a drag.

“Other areas that dragged down gross margin included labor inflation which more than offset lower material inputs, currency, and lower Converse license revenue,” Komp stated, while adding, “NKE noted that lower variable compensation provided a nearly $40 million year-over-year benefit.”