Nike (NKE) Q3 profit misses estimates on Covid-19, transition charge

Nike Inc. (NYSE: NKE) reported a 23% dip in earnings for the third quarter of 2020 due to a transition charge of Brazil, Argentina, Chile and Uruguay businesses to a strategic distributor model as well as Covid-19 outbreak. The top line exceeded analysts’ expectations while the bottom line missed consensus estimates.

Net income plunged by 23% to $847 million or $0.53 per share. Revenue rose by 5% to $10.1 billion. Analysts had expected EPS of $0.59 on revenue of $9.8 billion for the third quarter.

Gross margin decreased by 80 basis points primarily as a result of impacts from Covid-19, including a lower mix of sales in Greater China which is the highest margin geography, as well as increased rebates to wholesale partners and higher costs related to factory cancellations to manage future inventory.

For the third quarter, the top line increased by 7% on a currency-neutral basis, driven by 13% currency-neutral growth in Nike Direct with digital growth of 36% and strong growth across EMEA, APLA and North America, offset by the impact of Covid-19 on its business in Greater China. Digital sales in Greater China increased more than 30% while brick and mortar retail sales were impacted by temporary store closures related to Covid-19.

During the first two months of the third quarter, Greater China’s revenue grew strong double digits, offset by the impacts of coronavirus beginning in late January. At the peak in February, roughly 75% of Nike-owned and partner doors in Greater China were closed with others operating in reduced hours.

Currently, nearly 80% of doors are open in Greater China with an even higher rate in key cities. Beginning March 16, all Nike-owned stores, outside of Greater China, Japan and Korea were closed to help curb the spread of the virus.

Cash and equivalents and short-term investments were $3.2 billion, $864 million lower than last year, as share repurchases, dividends, and investments in infrastructure more than offset proceeds from net income.

Nike’s competitor Under Armour (NYSE: UAA) reported weak fourth-quarter 2019 earnings and revenue due to demand headwinds arising from the transformation strategies, which is likely to improve inventory management and strengthening the balance sheet.

The stock ended Tuesday’s regular session up 15.18% at $72.33. In the after-hours, the shares gained over 5% despite remaining overvalued at current levels.