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Footwear retailer NIKE (NKEFree NIKE Stock Report) has reported results for its fiscal 2018 third quarter ended February 28th. Revenues and earnings both came in slightly below our initial targets, but were in line or beat the reduced figures that had been surfacing in the last few days on Wall Street. The headlines will read that a significant quarterly loss was posted, but this is directly tied to the changes in the tax code and will be excluded from our figures. Backing that out, the fiscal third quarter looks like a solid one, and the investment community appears to be echoing this sentiment, as NKE stock is up in pre-market trading today.

Revenues rose 7% on a year-over-year basis, to $9.0 billion. The consensus had fallen to around $8.85 billion recently. The consumer direct approach appears to be a hit, as double-digit growth across a number of international geographies was evident. Sales in China jumped 24%, versus the same period in 2017, leading the way on the global front. Conversely, receipts in North America dipped 6%. A negative reading was expected, with the company continuing to deal with extreme competitive pressures here at home, but investors probably still will be troubled by this decrease. In that regard, management was quick to point out that it sees a change in the negative momentum of North America. The scaling of new innovation platforms and differentiated consumer experiences are expanding in these markets and over time are expected to remedy current ailments.

Share net clocked in at $0.68 after excluding a $2 billion charge, or $1.25 a share, in response to the tax overhaul. Initially, we had our target set north of $0.70, but in the weeks leading up to the earnings release that figure had trended toward the $0.50 mark on The Street. Therefore, we think Wall Street will be happy with this figure, for the most part. Gross margins took a hit, due to unfavorable currency exchanges. That metric slipped 70 basis points, to 43.8%, and would have been worse if not for lower product costs.

The North American concern is probably the stock's largest overhang in the near term. The company has lost some of its luster in its biggest market. Millennials present a different challenge, as they demand specialization and discounting, two items that can often weigh on profitability. Add to this, NIKE is feeling pressure from Adidas and, to a lesser extent, Under Armour, who are nipping at its heels at every opportunity to steal market share. A strong relationship with the NBA is just what the company needs as we head into that organization's postseason, and should help in the coming months. Direct-to-consumer and e-commerce initiatives also are in full swing to stem the downturn in domestic receipts, but these are changing times in retail and it is difficult to pin down the exact ramifications of such moves.

Management did not provide any guidance for the balance of the fiscal year, but we do think that the Wall Street consensus has fallen too low ($2.30 a share). In that vein, we are looking for a fourth-quarter share-net tally of $0.74 that would bring our full fiscal year figure to $2.45. This level still represents a year-over-year decline from the fiscal 2017 figure of $2.51. However, several of the worst case scenarios that have been thrown out there earlier in the year no longer look to be in play. Also, we now are targeting annual sales north of the $36 billion mark, and upside to this figure exists if the North American situation improves more quickly than we envision.

From an investment perspective, we like NIKE as a longer-term total return play. Yes, at the moment it is having troubles in its primary market, but we look for a positive resolution to this situation in the coming 12-plus months. That aside, this equity offers a solid mix of appreciation potential and income for the stretch to 2021-2023. Too, subscribers can be patient here and wait for better entry points as they see fit because we see no reason to rush in given the current market dynamics both in-house at NIKE and when speaking to the broader retail climate.

About The CompanyNIKE, Inc. designs, develops, and markets footwear, apparel, equipment, accessories, and services. It sells products to retail accounts, through NIKE-owned retail stores and the Internet, and through a mix of independent distributors and licensees in approximately 190 countries. Subsidiary brands include Converse casual sneakers and Hurley lifestyle apparel and accessories.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.