Nike (NKE) will report its fiscal-first-quarter results on Thursday, after the market closes.
Analysts are expecting the company to report revenues of $8.2 billion and an earnings per share of $1.19, representing year-over-year growth of 3% and 9.2%, respectively.
Given Nike’s long and storied history of beating Wall Street expectations, the question isn’t whether Nike will beat expectations again this quarter but rather what investors will be watching closest and whether NKE stock should be held ahead of Nike earnings.
What Will The Street Be Watching?
Often when a large company like NKE reports earnings, it’s not the top and bottom line that determine whether the stock trades higher or lower. Instead, it’s the little nuances of the quarter that suggest what’s to come.
In this quarter, currency changes will play a large role. Nike earned 55% of its revenue last year outside the U.S., with Europe playing an especially important role in the company’s performance — it accounted for more than 20% of total revenue.
During Nike’s fiscal fourth quarter, revenue increased 4.8%, but in constant currency, the growth rate would have been 13%. With the U.S. being one of Nike’s biggest growth drivers, investors will closely monitor how currency exchange in Europe affects the overall business.
Moreover, NKE found 20% growth in greater China last quarter, so how China’s slowdown affects the company will also be very important.
NKE’s U.S. Sales Should be Strong Enough
The slowdown in China and currency mess in Europe certainly pose a risk. However, I expect the U.S. to carry Nike’s quarter to yet another beat. Not only is Nike’s fiscal first quarter during the back-to-school season, but the footwear market, where Nike creates the majority of its revenue and profits, is surging in the U.S.
According to AdBrands, the Nike and Jordan brand controls about 60% of the U.S. footwear market, a market that grew 8% in the first half of 2015. This greatly exceeds Nike’s 33% share of the global footwear market, and is made possible due to its near-complete dominance of the basketball market.
Furthermore, Nike’s future orders saw a 13% increase to end its last quarter, suggesting strong performance from a wholesale business that accounts for more than 75% of Nike’s total revenue.
Assuming that demand carried into the second half of the year, Nike earnings should have no problem beating analyst expectations in the quarter.
Global Concerns Have Weight with NKE Stock
With that said, bullish market data and Nike’s strong orders to end fiscal 2015 all insinuate good performance in North America for its fiscal first quarter. However, guidance is a big question mark, mainly because we can’t predict the wholesale demand for this coming quarter or the effect that China and Europe, which account for one-third of Nike’s business, will have short-term.
China and Europe pose too large a threat to feel confident in an investment ahead of earnings, especially given the company’s valuation.
This is a company that historically traded around 15 times forward earnings prior to 2013, but since then has become far more expensive and now trades at nearly 25 times next year’s expected earnings. With a market capitalization of $100 billion, that’s an expensive multiple, and given the risks associated with Europe and China, it’s not feasible to believe that North America’s strength alone can support such a high multiple for much longer.
In other words, Nike earnings might very well beat analyst expectations on Thursday, but because of its valuation, guidance must be superb, and that’s just not realistic given the environment in China and the ongoing currency drama in Europe.
Bottom Line
Sooner or later, NKE will come back down to earth, and with significant global concerns and rising interest rates an ongoing risk, it’s dangerous to hold Nike’s stock ahead of earnings.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
