Shares of Nike Inc (NKE) are plunging on Wednesday, after the world’s biggest athletic apparel company reported disappointing sales and guidance figures. Earnings per share came in above expectations, but it wasn’t enough to save NKE stock, which was down about 4% in morning trading.
Under Armour Inc (UA) stock was down about 1% in sympathy.
Let’s take a look at the results, and see if this changes anything about the investment potential of NKE stock:
NKE: Execute or Be Executed
The fiscal third quarter, which ended in February, was actually a pretty important one for Nike stock. The high-profile company set an ambitious goal for itself last year, aiming to get to $50 billion in revenue by 2020.
To get there, Nike will have to grow revenue by an average of 11% annually through 2020, if it hits its expected revenue numbers this year.
You don’t have to grow revenue by 11% every quarter like clockwork, but you have to be moving towards it, and with Q3 running from December through February, you’d like to see a holiday sales boost.
Instead, NKE grew revenue by just 7.7% in Q3, to $8.03 billion, missing consensus expectations for 9.9% growth and $8.2 billion in revenue. Currency headwinds played a big role in the miss: on a constant currency basis, revenue would’ve jumped 14%.
EPS fared a little better, coming in at an adjusted 55 cents vs. calls for 49 cents.
But frankly, EPS matters very little in this scenario. The $50 billion goal is out there, and it’s a big part of Nike’s valuation. I doubt we’d see NKE stock trading at 25 times forward earnings if we dismissed the $50 billion figure as impossible.
As I said in my NKE earnings preview on Monday,
“If NKE can’t beat revenue estimates and also raise revenue guidance, shares could be in trouble.”
Not only did Nike not beat revenue estimates, it guided for Q4 revenue to increase by mid-single digits, well below the 8.9% clip analysts are expecting.
Let me break down why this is mathematically unfortunate for NKE, if it truly hopes to reach that $50 billion goal — something I believe the market is somewhat counting on, given its valuations.
Through three quarters of fiscal 2016, Nike now has $24.13 billion in revenue for the fiscal year. Let’s say that, charitably, NKE grows revenue in the “mid-single digits” as it expects, growing revs by 6% YoY in Q4. That would come out to $8.25 billion, making FY 2016 revenue $32.38 billion.
Even rounding up to $32.4 billion, we’re $390 million below the $32.79 billion Wall Street expects.
More importantly, growing at an 11% clip annually through 2020 doesn’t get NKE to $50 billion by 2020 anymore … it gets Nike to $49.19 billion.
That’s disconcerting, since at this pace it may very well take Nike several years to ramp up to 11% revenue growth. Plus, do we not think there will be any economic hiccups between now and 2020? We just entered the eighth year of the bull market. Bull markets don’t last forever.
Bottom Line for Nike Stock
In the end, it comes down to currency fluctuations, which will either get Nike to its goal or leave it well short of its goal: If the dollar weakens over the next few years, NKE is far more likely to get to $50 billion. If it strengthens — well, you won’t want to be holding Nike stock.
The fact that the fate of NKE shares are largely outside the hands of management is extremely disconcerting. If I wanted to bet on which way the dollar was going over the next four years I’d be a Forex trader.
Given its rich valuation and over-reliance on the fundamentally unpredictable currency markets, I’d ditch NKE stock and buy a company with more control over its own destiny.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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