We’re about to get a good sense of just how strong the athletic apparel market is. That is, industry leader Nike Inc (NKE) reports fiscal third-quarter earnings Tuesday after the market closes.
As always, NKE stock owners would like to see a consensus-beating quarter from Nike. But this is especially true after upstart rival Under Armour (UA) blew the top off expectations in its late-January Q4 report, sending UA shares roaring 22% higher.
We certainly can’t expect that sort of outperformance from Nike, since its size and maturity make results much more predictable. But that doesn’t mean the sneaker giant can’t still put in phenomenal quarters; and in some ways, Under Armour’s beat is a good omen for NKE stock.
Let’s take a look at what Wall Street expects from the retail behemoth from Beaverton, Oregon.
NKE: Make the Numbers, Get to $50 Billion
Last year, Nike made the famous declaration that it was aiming for $50 billion in annual sales by the year 2020. For a company that posted revenue of $30.7 billion last year, that’s a pretty high bar. Nike will have to grow sales by 60% in five years, or about 11% annually (due to compounding, NKE doesn’t have to hit 12% annually).
To do that, Nike will have to surpass current expectations. In the fiscal third quarter, which ends in February, analysts expect Nike to earn 49 cents per share on revenue of $8.2 billion, up 9.9% year-over-year.
As always, remember that it’s not so much about what the company just did, but what it expects to do in the future. In the May quarter, the market’s looking for NKE to earn 54 cents per share on revenue of $8.47 billion, up 8.9% year-over-year.
There’s nothing wrong with 9% or 10% growth, but it simply won’t get Nike to $50 billion by 2020. But it’s not a concern if Nike can’t post that sort of growth right now. There’s plenty of time for that … but we do need to see improvement.
It would be really nice to see NKE beat that $8.2 billion revenue expectation. Guiding higher for next quarter would be even better.
While it may seem like a longshot for a mature company the size of Nike to accelerate revenue growth at this stage in the game, it is totally possible. That’s because NKE plans to increase the percentage of direct-to-consumer sales, which are far more lucrative than going through retail partners like Finish Line (FINL) or Foot Locker (FL).
To this end, Nike recently announced intentions to push more product through its app, Nike+. Specifically, it plans to drop a self-lacing shoe, the HyperAdapt 1.0, before holiday season, offered exclusively to Nike+ members.
That should do the trick.
NKE stock is up 30% in the last year, trading at 25 times forward earnings, a hefty multiple. But if we’re buying Nike shares at these levels we have to assume that Nike can beat estimates going forward, so it’s not a totally absurd valuation.
We’ll have more insight into how Nike’s doing in its early stages of the $50 billion-by-year-2020 thing on Tuesday afternoon. If NKE can’t beat revenue estimates and also raise revenue guidance, shares could be in trouble.
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 editor@investorplace.com.
