Nike Stock Tumbles After Earnings Beat. ‘Just Buy It,’ Analyst Says.

A Nike bag is displayed at a mall in Bangkok. (Lauren DeCicca/Getty Images)

Key Points

• Nike exceeds fiscal second-quarter earnings and revenue estimates, but its stock tumbles.
• Revenue increases 1% to $12.4 billion, with North America up 9% and Europe, Middle East, and Africa up 3%. Greater China sales fall 17%.
• Adjusted earnings of 53 cents a share surpass estimates, though net income decreases 32% to $792 milliion.

Nike’s turnaround under new CEO Elliott Hill got off to a promising start. But after a little over a year in the job, he now has to prove to investors that early efforts can lead to sustained, stable growth.

The stock market isn’t convinced by Nike’s latest earnings report.

Nike’s fiscal second-quarter results presented a muddled picture. Although the earnings and revenue surpassed expectations, the stock fell 11% to $58.25 in premarket trading Friday, reflecting investors’ disappointment over declining profits and lackluster sales in China. The S&P 500 was little changed.

Nike revenue of $12.4 billion rose 1% year over year in the quarter ended Nov. 30, better than projections for $12.2 billion. From a regional standpoint, North America and Europe, Middle East, and Africa led the revenue improvement, up 9% and 3%, respectively, from a year ago. Greater China sales, however, were down 17%, accelerating from the first quarter’s 9% decline. Converse brand revenue fell 30% from a year ago, also weighing on top-line growth.

The company posted adjusted earnings of 53 cents a share, compared with estimates for 37 cents a share. While the results were better than analysts expected, this quarter’s earnings were 32% lower than they were a year ago. Net income of $792 million also fell 32%.

There were a couple of factors weighing on Nike’s profitability. For one, gross margin fell three percentage points, primarily due to higher tariffs in North America. The company also saw an 8% decline in direct-to-consumer sales, which tend to carry higher margins than the wholesale business. Margins took a hit from Nike’s efforts to clean out old inventory and bring in new products.

Jefferies analyst Randal Konik was encouraged by the earnings, which he said “confirm the turnaround is gaining traction.” He maintained a Buy rating on the stock and has a price target of $110, implying a gain of 97% from Thursday’s closing price.

Created with Highcharts 9.0.1NikeStock ticker: NKESource: FactSetNote: Class B sharesAs of Dec. 19

Created with Highcharts 9.0.12025Dec.50556065707580$85

“With shares near multi-year lows, we would buy at these levels. Just BUY It,” he said in a note early Friday.

A 13% annual increase in spending on demand creation—chiefly marketing expenses—also pushed up selling and administrative expenses slightly.

“Nike is in the middle innings of our comeback. We are making progress in the areas we prioritized first and remain confident in the actions we’re taking to drive the long-term growth and profitability of our brands,” Hill said.

On a call with investors Thursday, Hill reminded investors that some quarters will be stronger than others as new initiatives take hold.

“Our comeback continues to move at different speeds,” he said. “It won’t be a straight line, but we’re acting decisively to accelerate the lagging areas, with China at the top of that list.”

The company’s third-quarter guidance, issued during the earnings call, deepened the shares’ decline. Nike has refrained from providing full-year guidance for several quarters now as it works on the turnaround.

“The NKE turnaround is still struggling to gain traction and continues to take longer,” wrote Tom Nikic, an analyst at Needham. “While we agree with management’s overarching strategy (focus on sport, re-engagement with wholesale, etc.), it’s becoming evident that the company’s issues prior to CEO Elliott Hill’s arrival were far deeper than we initially realized.”

Nikic lowered his price target for the stock to $68 from $78 on Friday, but maintained a Buy rating. Nike’s mean price target had fallen to $78.34 Friday morning from $83.34 at the end of November, according to FactSet.

Nike expects third-quarter revenue to be down by a low single-digit percentage. Analysts had projected a 1.3% increase. North America will see modest growth in the quarter, while trends in Greater China and Converse should be in line with the second quarter.

Gross margins will be down between 1.75 and 2.25 percentage points from a year ago. However, excluding a roughly 3.15 percentage point hit from tariffs, gross margins would have expanded in the quarter, said Matthew Friend, Nike’s chief financial officer, reflecting better performance in North America.

“North America is driving a healthy, repeatable offense and showing us what winning looks like,” Hill said. “It’s a great signal for our future success in other geographies.”

It just isn’t great enough to convince the stock market yet.

Write to Sabrina Escobar at sabrina.escobar@barrons.com