Street Looks Past Nike's Strong Q1 As Slowing Futures Orders Forebode Limited Upside

Analyzing Nike Inc NKE's first-quarter results, Bank of America Merrill Lynch said it sees limited upside for the company as futures orders slow. The firm reasoned that the outperformance by Nike in Q1 relative to its forecast was due to higher revenue growth, lower SG&A, higher "other income" and lower tax rate.

Robert Ohmes, an analyst at the firm, noted that these positives helped to counter the weakness engendered by lower gross margin, as its North American business sees inventory clearance, shift in expenses from operating overhead to COGS, impact from exiting gold business and forex impact.

Among the categories that led to revenue growth were sportswear, running, women's and brand Jordan.

North American Futures Sag

BofA Merrill Lynch noted that North American futures growth of 1 percent was below its 6 percent forecast, while futures at Western Europe, emerging markets and Japan all remain strong. Global forex neutral futures growth also decelerated. The firm attributed the weakness in North America to the company's efforts to rebuild a pull market. The firm noted that direct-to-consumer remained very strong.

Related Link: There Are A Lot Of Moving Parts To Understand In Nike's Q1 Results

2017 EPS Estimate Intact, 2018 Cut

The firm maintained its 2017 earnings per share estimate at $2.35, as upside surprise in the first quarter is offset by shrinking margins expected due to inventory clearance. However, the firm lowered its 2018 earnings per share estimate by $0.05 to $2.90, citing lower revenue outlook due to deceleration in future orders.

Rating And Logic

As such, BofA Merrill Lynch remains Neutral on the shares of Nike and has a $55 price objective for the shares.

The Neutral rating is premised on the company losing market share in North America for the first time since 2010, as adidas AG (ADR) ADDYY and Under Armour Inc UA make inroads. Additionally, Nike's obsession with technical products and scope for deceleration in futures orders in Western Europe, China and emerging markets may also hurt, the firm noted.

The firm also feels profit outlook would suffer from competition for endorsements and industry talent.

At time of writing, shares of Nike were down 1.52 percent at $54.52.

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