This Thursday, after the closing bell rings, athletic apparel and footwear maker Nike Inc (NYSE:NKE) will post its fiscal Q3 numbers. As far as earnings reports go, the one about Nike stock won’t be any more watched than any other report from the earnings season that’s now winding down.
And, it would be surprising if the company didn’t dish out the earnings beat Nike stock owners have grown accustomed to for the past several years.
Nevertheless, this is a report all interested investors may want to pay a little extra attention to, not just because of what the numbers may suggest, but because it will serve as an indication of how well the “new and improved” Nike may fare in the modern era.
Transitory
Long story made short, Nike may be on fire overseas, but it’s struggling in North America.
It’s moved toward direct-to-consumer approaches, pushing sales via Nike.com as well as through its own stores. The effort has paid off too, with sales through those venue growing 13% over the course of the first two quarters of fiscal 2018. Digital sales were up 29% alone.
It’s just not enough. Between a cutthroat North American market where Under Armour Inc (NYSE:UAA) continues to compete while adidas AG (ADR) (OTCMKTS:ADDYY) continues to rekindle its relevancy, Nike is hitting a headwind.
Though last quarter’s revenue was up 3% on a constant-currency basis, it was up at the expense of margins; Nike had to get more aggressive with pricing.
Margins were expected to shrink again for the quarter that ended in February.
Still, while Nike can do little about the market environment in North America, it can do something about its product lines, and the excitement that create.
Enter the Epic React… a running show with an incredibly bouncy but light foam sole. The shoe itself epitomizes a wave of innovation Nike has had to create for itself. Analysts have taken notice though. Wedbush analysts, for instance, commented just a few days ago:
“The cadence of new footwear styles are notably higher versus a year ago and the pipeline embraces more retro and casual silhouettes (Air 270, Shox Gravity, Epic React) versus largely a single technical style last year (VaporMax). At the same time comparisons are easing, particularly around key categories like basketball and in some aspects, returning to growth.”
All the same, the analyst community remains mixed as to just how well this innovation will much-needed growth in North America. B. Riley’s Susan Anderson has enough doubt to voice a below-consensus earnings outlook.
Stifel analyst Jim Duffy is at the other end of the spectrum, writing last week “We remain optimistic for Nike’s North America turnaround and international and direct momentum and reaffirm our buy rating and $80 price target.”
A company that’s a work-in-progress is a tough one to handicap.
Looking Ahead for Nike Stock
As of the latest look, the market is anticipating revenue of $8.85 billion and earnings of 53 cents per share of Nike stock. That top line would be a respectable 5% improvement on last year’s $8.43 billion worth of sales, but the bottom line would be lower than the 63 cents per share it booked in fiscal Q3-2017.
And there’s the rub. While some of the margin compression is being attributed to spending associated with innovation, it’s not exactly clear how much of that weakening profit is still the result of price-crimping competition.
There’s another frustrating nuance of the matter. Where Nike is today may not be where it is a year from now, as it continues to cultivate its direct-to-consumer business including a relationship with Amazon.com, Inc. (NASDAQ:AMZN) that was only forged in the middle of last year.
It’s all relatively new territory for Nike, which for years was able to generate great success as a wholesaler to other retailers. Things are changing though.
It’s a tricky situation. As Susquehanna Financial Group put it “In the near-term, North America trends remain lackluster and it is unclear to us how quickly and to what degree Nike can execute a turnaround,” leading the firm to “remain on the sidelines” until there’s more clarity.
In other words, betting on Nike stock now, particularly heading into Thursday’s earnings report, is a bet that the turnaround plan as you know it is already getting traction, and will continue to do so.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
