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Was Nike's Sell-Off Justified?

By Motley Fool Staff – Updated Apr 17, 2019 at 10:47AM

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The sneaker company beat expectations on profits, and its guidance looks solid, too.

Athletic gear and sneaker king Nike (NKE 4.26%) delivered what to the unjaundiced eye would appear to be an upbeat quarterly report late last week: It beat expectations on profits, and U.S. revenues rose 7% year over year. Yet Wall Street traders sent its share price lower.

In this segment of the Motley Fool Money podcast, host Chris Hill and Fool senior analyst Jason Moser attempt to explain what in the fiscal third-quarter report might have led investors to fear for Nike's future profits, why the slowing-growth narrative is misguided, and what's really happening with the company.

A full transcript follows the video.

This video was recorded on March 22, 2019.

Chris Hill: Shares of Nike falling a bit this week after third-quarter profits came in higher than expected, with revenue up 7% compared to a year ago. Jason, help me out. This is Nike we're talking about. This is a good quarter. Maybe I missed it, but I didn't hear CEO Mark Parker giving any kind of big warning in the guidance. Why the sell-off?

Jason Moser: I think the headlines about slowing growth here are a bit misleading. If you go through the release in that call, the only thing that's really playing in the form of headwinds are currency effects. To your point, this was a good quarter. I think they've laid out pretty good guidance for the coming 2020 fiscal year as well.

Listen, we were talking about this over the last year, year and a half -- every quarter, North America was just brutal. Sales were falling. Then they got back to flat. Then, all of a sudden, growing 1% was the picture of perfect success. They grew North American sales 7% this past quarter, which was really impressive, particularly when you consider that we were talking about that silly Zion Williamson incident.

Speaking of basketball, Chris, I mean, let's just take a minute here to just doff the cap there to my Wofford Terriers. Now, they're an Adidas crew. Let's be clear here. Adidas' headwinds notwithstanding, that would probably make a better situation for Nike anyway. But congratulations, Wofford, for getting out there and taking it to Seton Hall this past evening. I was thrilled to see that.

Now, back to Nike. I do think this is honestly a bit misleading as an analyst that covers the stock. This is a wonderful business. They continue to do all of the right things. Like I said, laid out good guidance for 2020, gross margin is up again on some pricing power there. They're repurchasing shares, bringing that share count down. Currency effects are just part and parcel of being a global business.

Hill: A reminder for those who have forgotten -- and I have to admit, from time to time, I forget this myself -- Nike owns Converse. One of the things I read was that Converse sales this quarter really weren't all that great. I never thought of Converse as being a significant part of the Nike business. Is it really enough where if Converse has a bad quarter, that's going to really have a ripple effect for the overall company?

Moser: It's not. The Nike brand itself is really the powerhouse. If you see weakness in Converse, they can sit there and play out that headline that Vans is taking share from Converse and Nike's in trouble. I mean, let's see the forest for the trees here and really recognize, this is a company with a lot of power in the brands that it owns.

Again, I did mention, Adidas is running into some North American headwinds, some supply chain issues. Under Armour, we know, is still trying to get their house in order as well. This all puts Nike in a very good position for the upcoming year. As an investor, I'd be very encouraged.

Check out the latest earnings call transcript for Nike.

Chris Hill has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.

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