Why One Key Analyst Expects Little Growth From a Streamlined Nike

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Nike Inc. (NYSE: NKE) announced several operational and organizational changes in what it calls its Consumer Direct Offense. Perhaps the biggest highlight of this release was the 2% reduction in the global workforce. With such big changes coming to the Swoosh, one key analyst decided to weigh in on the stock.

While such an announcement two weeks before the fiscal fourth-quarter scheduled earnings is not a positive, Wedbush believes these changes are being made in recognition of what it believes will be a fiscal 2018 featuring flat to down EPS.

For the fiscal fourth-quarter the firm estimates that fiscal 2018 EPS will be $2.35 (versus consensus of $2.53). According to Wedbush’s earnings preview:

We are lowering our fiscal 2018 EPS estimates given: 1) the US market remains promotional given the changes in MAP pricing and the potential for modest margin pressure within Nike’s direct-to-consumer (DTC), 2) $1.6 billion-$2.0 billion in f/x related pressure between fiscal 2016-2018 with nearly half occurring in fiscal 2018, essentially wiping out nearly all the EPS growth potential, 3) two key events that will drive higher demand creation spend (Olympics and World Cup) and 4) artificially low tax rate in fiscal 2017 (15%) will likely normalize to the 20% level in fiscal 2018. We believe the combination of these factors will drive a more difficult first half of 2018. Nike is taking the right steps around speed and SKU rationalization. However, it will take time for these to meaningfully impact the sales and margins.

Nike is introducing what it believes to be a more simplified structure that will improve efficiency and enhance connection to the local consumer. There will now be four geographies instead of six, each under one leader: North America; Europe, Middle East and Africa (EMEA); Greater China; and Asia Pacific and Latin America (APLA).

The financial results for the Nike Brand will be reported based on these four geographies beginning in fiscal 2018. In addition, some of the personnel changes announced are designed to improve speed to market and enhance its global DTC growth.

Shares of Nike were last seen down 3% at $53.03 on Thursday, with a consensus analyst price target of $62.24 and a 52-week range of $49.01 to $60.33.

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