Nike profit tops targets but margins disappoint some

By Nivedita Balu

(Reuters) - Nike Inc topped first-quarter profit on Tuesday, but a small rise in gross margins and no change in its 2019 forecast despite the launch of a successful ad campaign was not enough for some investors, sending shares down 4 percent after hours.

"I think where the market might be slightly disappointed is around the gross margins ... it is slightly weaker than expected," MainFirst Bank analyst John Guy said.

Nike gross margins rose 50 basis points to 44.2 percent in the reported quarter, in line with average analysts' estimate, according to Thomson Reuters I/B/E/S.

"The numbers are good, but they weren't wow enough," said Jeff Auxier, founder & portfolio manager at Auxier Asset Management.

 

For the second quarter, during which it launched its campaign featuring former NFL quarterback Colin Kaepernick, Nike forecast revenue growth and gross margin expansion similar to the reported quarter.

Many analysts said the campaign plays to Nike's core demographics in the United States, and has translated to 61 percent more merchandise sold during the period, according to Thomson Reuters Proprietary Research.

The Oregon-based athletic shoe maker also expects costs to grow in the low teens in the current quarter on higher investments in its digital platform and sports marketing during kickoff of the NBA and NFL seasons.

The company's demand creation expense, or costs related to advertising and promotion, rose 13 percent to $964 million in the first quarter.

The company also maintained its forecast for fiscal 2019. (https://reut.rs/2OO7QLh)

However, Nike's direct-to-consumer model helped sales in North America rise 6 percent, its second straight rise, showing signs of recovery after competition from rivals Adidas AG and Under Armour eroded sales in three out of the last four quarters.

"We returned to strong growth in North America even faster than what we had expected," Nike Chief Financial Officer Andrew Campion said on a post-earnings call with analysts.

Sales in North America rose 6 percent in the reported quarter.

Revenue rose 9.7 percent to $9.95 billion, beating estimates of $9.94 billion.

The company's net income rose to $1.09 billion, or 67 cents per share, in the first quarter ended Aug. 31, from $950 million, or 57 cents per share, a year earlier.

Analysts had expected the company to earn a profit of 63 cents per share.

Nike's shares have risen 36 percent this year and gained 3 percent since Sept. 3, when the company came out with a controversial ad campaign featuring former NFL player Colin Kaepernick earlier this month.

"My only guess, is that the street wanted more. I think Nike is on a steady trajectory," Jane Hali & Associates' retail analyst Jessica Ramirez said.

The company's shares were down 4 percent at $81.45.

(Additional reporting by Soundarya J in Bengaluru; editing by Shounak Dasgupta and Sandra Maler)