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Nike's future sales growth may not be as bad as it looks

Nike shares slipped 1.5 percent Wednesday, hours after the athletic wear company reported a low-quality earnings beat and weak future order numbers in the fiscal first quarter.

But while its business has been challenged by the resurgence at Adidas and consolidation in the sporting goods space, Wall Street may be putting too much emphasis on its so-called futures orders. That number refers to orders placed by wholesale customers that were not delivered during the quarter, and have traditionally been considered a proxy for future demand.

Nike futures fell shy of Wall Street's estimate for 8 percent growth, excluding currency swings, rising 7 percent. That compares to an 11 percent increase in the fourth quarter. Future orders in North America grew at their worst rate in more than six years, ticking just 1 percent higher. That region accounts for about half of Nike's revenue.

On a call with investors following its earnings report, Nike management downplayed the importance of its futures number, saying it's becoming a less important metric for gauging the health of its brand. That's partly because a larger percentage of its business is starting to occur in its own stores and at Nike.com. As a result, the company will no longer break out this figure in its earnings release, and will instead outline it on a call to provide additional context.

"We expect North America's reported revenue growth over the balance of the year to outpace the rate of futures growth," CFO Andy Campion said, pointing analysts toward the company's guidance for high-single-digit revenue growth this fiscal year.

"The most important thing to look at, I think, is the sales guidance," Morgan Stanley analyst Jay Sole told CNBC.

An employee carries Nike Inc. sneakers for a customer at a Dick's Sporting Goods Inc. store in Sterling Heights, Michigan
Sean Proctor | Bloomberg | Getty Images
An employee carries Nike Inc. sneakers for a customer at a Dick's Sporting Goods Inc. store in Sterling Heights, Michigan

While such an abrupt slowdown in futures orders was impossible to overlook — especially when considering Nike's other headwinds — Evercore ISI analyst Omar Saad agreed that investors are putting too much weight on the metric.

"We think the market is overreacting to the futures deceleration," he told investors, explaining that "a variety of factors have recently contributed to a growing disconnect between futures growth and true demand trends."

Among them are the rising importance of its direct-to-consumer business, which includes its bricks-and-mortar stores and brand website. That division accounts for roughly a quarter of Nike's overall revenues, Saad said.

Nike's direct-to-consumer business rose 22 percent in the second quarter, driven by 49 percent growth online. That easily outpaced its overall sales increase of 8 percent, bringing its revenue to $9.1 billion.

Still, although analysts acknowledged Nike's long-term potential, several noted on Wednesday that headwinds will remain in the near term. They include a strong U.S. dollar, the bankruptcies of Sports Authority and Sport Chalet, and a shift toward fashion sneakers that's helping Adidas.

Brean Capital analyst Eric Tracy downgraded Nike's stock to hold from buy, saying there are limited near-term catalysts to drive its shares higher.

Nike on Tuesday reported earnings of 73 cents a share, topping the consensus analysts estimate of 56 cents. The brand was helped by stronger-than-expected sales growth, a one-time tax benefit and having fewer shares listed.

Nike shares are down more than 11 percent this year.