Nike Slides After Tariffs Hit Margins, Despite Beating On Top And Bottom Line

On the surface, Nike’s Q2 results were stellar, with the sportswear company beating on the top and bottom line, and yet Nike stock, which as a reminder has a weight of around 2% in the Dow Jones, is trading well lower after-hours. The reason: the company’s modest miss on margins and warning about “higher product costs, primarily due to incremental tariffs in North America.”

Here are the Q2 details, starting with the good:

• Revenue $10.33 billion, +10% y/y, beating the estimate of $10.08 billion
• EPS 70c vs. 52c y/y, estimate 58c
• Pretax profit $1.25 billion, estimate $1.08 billion (range $1.04 billion to $1.11 billion)
• North America rev. $3.98 billion, +5.3% y/y, estimate $3.99 billion
• Asia Pacific & Latin America rev. $1.47 billion, +13% y/y, estimate $1.40 billion
• Greater China rev. $1.85 billion, +20% y/y, estimate $1.80 billion
• EMEA rev. $2.54 billion, +9.7% y/y, estimate $2.46 billion

However, it was the bad that the market was more concerned about when it comes to the stock that has been priced to perfection:

• First, NIKE reported that its effective tax rate slumped again, dropping to 10.7% vs. 15% y/y
• Next, Inventories jumped by 15% Y/, to $6.2 billion. Is the company frontrunning even more tariffs in 2020?

Finally, the one item that traders are blaming the sell off on, Nike’s Q2 gross margin:

• Gross margin up modestly to 44% vs. 43.8% y/y, but missing the estimate 44.1%

What happened? This is how the company explains it:

gross margin increased 20 basis points to 44.0 percent primarily due to higher average selling prices and margin expansion in NIKE Direct and Converse, partially offset by impacts from higher product costs, primarily due to incremental tariffs in North America.

It was the warning about higher product costs from tariffs that appears to have spooked bulls, and the stock dropped after hours, sliding from above $101 to as low as $98, however putting that move in context, it puts NKE stock to a level not seen in… two days.

And while the stock may be down after hours, we doubt it will stay low too long. Why? Because NIKE still has about $12 billion left in its buyback program which has to be concluded by Jan 2022.

During the second quarter, NIKE, Inc. repurchased 10.1 million shares for approximately $922 million as part of the four-year, $15 billion program approved by the Board of Directors in June 2018. As of November 30, 2019, a total of 33.6 million shares had been repurchased under this program for approximately $2.9 billion.