With rivals Under Armour Inc (NYSE:UA) facing a mountain of performance problems and close cousin Adidas AG (ADR) (OTCMKTS:ADDYY) garnering market share, Nike Inc’s (NYSE:NKE) earnings report could leave NKE stock owners disappointed.
A closer look at the recent rhetoric, however, reveals owners of NKE stock — along with most analysts — are feeling pretty good about the company. And not just about its upcoming fiscal third-quarter results. The majority of observers are expecting a pretty healthy 2017 as well.
Are the masses right to remain bullish on Nike stock, which is up 15% year-to-date? Tomorrow’s quarterly earnings report will go a long way in answering that question.
Nike Earnings Preview
As of the most recent calculation, Nike is expected to report a profit of 53 cents per share on revenue of $8.47 billion. That top-line projection is 5.4% better than the year-ago figure, though the expected bottom line is a tad weaker than the 55 cents per share of NKE stock earned in the same quarter of the previous year.
Although uneven from time to time, Nike is now past the halfway point of a sixth consecutive year of earnings growth. It would be surprising if the trajectory was altered now. Indeed, not only has Nike not missed an earnings estimate in years, it’s topped estimates in each of the last eighteen quarters, suggesting another beat is in the cards for Tuesday.
If there was ever a chance for Nike to fall victim to a March Madness upset, tomorrow’s earnings report could be it.
Several retailers like Sports Authority, Golfsmith and many other smaller venues that sell Nike’s goods are shutting their doors, with some of them owing Nike money. While most of that is old news, it can take months for inventory issues to fully materialize.
Still, that potential downside seems to already be baked into earnings expectations.
Nike is expected to post its fiscal third quarter results shortly after Tuesday’s close, with a conference call to follow at 5:00 pm EST. Both will be informative, but owners of NKE stock may want to pay particular attention to three matters that could push the stock around more than any other. In no certain order:
Adidas Is Growing Market Share
For years it was a largely irrelevant brand compared to Nike and Under Armour, especially in the all-important U.S. market. But, Adidas is making some noise — and trouble — for Nike again.
“We are reiterating our Neutral rating & $51 PT on Nike shares ahead of their FQ3 earnings report on 3/21. Our proprietary market model indicates adidas? global share gains are accelerating, particularly in North America as the company sets its sights on growing its core brand to $5B by 2020. We see risk that Nike consensus sales & gross margin estimates are walked down over the NTM. While Nike typically meets/exceeds EPS on SGA control & often times tax rate, we believe futures have not yet inflected, see risk to Q4 gross margin & expect an initial FY18 guide that is below consensus.”
It won’t likely be discussed in any detail on Tuesday, but it’s something investors need to keep a firm grip on.
Demand for New Products
Although the company intends to discontinue publishing what it calls future orders — purchase commitments that have neither been paid for nor delivered — since it means less and less as a predictor of revenue, traders are still understandably fixated on the idea. In fact, Morgan Stanley analyst Jay Sole still thinks it’s an important enough figure to guess the number will only fall 2% YOY when Nike reports its third-quarter numbers on Tuesday. That would be an improvement on the 4% decline seen in the prior quarter.
Whether quantified or not, the new Air VaporMax shoe line is going to be critical to Nike’s near-term sales. Keep an eye/ear out for any color on that front.
New Clothing Lines
While the athletic Hijab is a creative step toward an untapped market, that’s not a huge opportunity. What is a huge opportunity is the plus-sized apparel market that has been largely dismissed by the industry. Nike recently launched a lineup of 1x, 2x and 3x fitness clothing for women, which NPD Group estimates could be a market worth $20 billion.
Bottom Line for NKE Stock
The bulk of the recent analyst rhetoric about NKE stock has focused on shrinking gross margins, and well it should. That quantitative metric, however, is ultimately a function of the more qualitative aspects of this business … the subjective ideas like addressing the right market with the right product at the right time. If the company gets those things right, it will sooner or later be evident in the Nike earnings reports.
With that as the backdrop, between new product initiatives, most of the retailer-closings headwind out of the way in addition to the fact that the Q3 earnings estimates have been lowered over the course of the past few weeks, it would be surprising if Nike didn’t deliver some relatively good news after Tuesday’s closing bell rings.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.