Though investors of Nike Inc (NYSE:NKE) are hammering the stock for two primary reasons, i.e. revenue miss and gross margin, the key factor is that the company gained notable market share in the same period. This could change the sentiments of investors on the stock. S&P Capital IQ has not only kept its Buy rating but also lifted its 12-month target price by $4 to $64. This suggests that the stock presents minimum ten percent upside potentials from the current levels.
On January 31, Under Armour Inc (NYSE:UA) suffered gross margin drop 3.2 percentage points in the December quarter, while Nike’s gross margin fell 1.4 percentage points. This could be interpreted as both are trying to win over customers of rival companies. Alternatively, pricing has been under pressure due to factors like increased costs on product and unfavorable impact from forex
S&P Capital IQ analyst Amobi defended his price objecting based on premium valuation on fiscal year ending May PE of 23.4X compared to rivals on notable market share gains. The brokerage lifted its fiscal year 2017 EPS view by 11 cents to $2.50. Similarly, for the fiscal year 2018, the analyst boosted its EPS estimate by four cents to $2.74.
Though Nike has not provided any forecast, Under Armour offered downbeat forecast for 2017. The company projected revenue growth of 11 – 12 percent to reach $5.4 billion. This was sharply lower than $6.06 billion expected by analysts when the company reported its earnings number on January 31. Aside from that, gross margin is expected to be slightly down from the level recorded in 2016.
Amobi pointed out that revenue growth of 5 percent came due to gains from apparel and footwear driven by uptick in North America, China, and Western Europe. Though its EBIT margins expanded 1.9 percentage points on productivity gains, sizeable contraction happened due to higher product costs and inventory markdowns.
At time of writing this, Nike stock dropped 4.15 percent in pre-market trading on Wednesday.