Don’t Let Inevitably Ugly Earnings Dissuade You From Nike Stock

For savvy investors, the long-term view is all that matters. Accordingly, even though Nike (NYSE:NKE) is likely to post ugly earnings this week, the release shouldn’t affect how investors view Nike stock.

Don't Let Inevitably Ugly Earnings Dissuade You From Nike Stock
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Before the novel coronavirus pandemic hit, of course, investors saw Nike as one of the best names in the market, and with good reason. Coming into this year, Nike’s stock had returned a staggering 56,300% since its 1980 initial public offering. That’s enough to turn $10,000 into $5.6 million.

I don’t expect that the next 40 years will be quite as impressive. But Nike stock remains a hugely attractive long-term pick, even if this week’s earnings won’t necessarily show why.

Soft Earnings

We know Nike’s earnings for the fiscal fourth quarter are going to be soft. We don’t know how soft, however.

Indeed, even Wall Street analysts are split. The high estimate for profit in the quarter is 46 cents per share. The most conservative estimate projects a loss of 48 cents. Revenue projections average $7.5 billion — but one firm sees sales of just $4.8 billion.

Some of the variability likely comes from the fact that not all firms have updated their models to account for the complete effect of the current pandemic. Still, generally speaking, the Street is looking for something like a 25% decline in sales, with earnings per share plunging to a dime from 62 cents the year before.

Indeed, we’ve already seen a similar report from another apparel leader. Lululemon (NASDAQ:LULU), another of my favorite stocks in the sector, saw its sales in fiscal Q1 decline 17% year-over-year. Adjusted EPS dropped 70%.

Nike is going to see a similar type of quarter. Stores worldwide were closed in March. Demand for youth products likely took a hit as schools closed.

Sales and profits are going to decline. The only question is by how much.

Watch for China

That said, there may be one bright spot in the quarter: China.

China is a key market for Nike. The Greater China region accounted for nearly one-sixth of revenue through the first three quarters of fiscal 2020. Growth there has been impressive so far, and Nike is looking for more going forward.

That region was beginning to open up when Nike reported third-quarter earnings on Mar. 24. Chief executive officer John Donahoe in fact said on the Q3 earnings call that “we’re seeing the other side of the crisis in China.”

A big Q4 in that region would bode exceedingly well for Nike stock. After all, strong pent-up demand as that market reopens would suggest a similar trend in North America and Europe.

Put another way, if investors see China bouncing back quickly, they likely will project the same recovery elsewhere in the world. With Nike stock still down over 5% year-to-date, that suggests shares could rally, even if consolidated results are sharply negative.

Will Nike Stock Benefit From This Crisis?

But I’d argue that long-term investors should be rooting for a decline in the company’s stock after earnings. It’s certainly possible: Lululemon’s stock has weakened since its earnings release earlier this month, though that stock had rocketed higher ahead of the report.

Again, savvy investors should take the long view. A couple of soft quarters don’t change long-term potential. And it’s possible that this crisis may even benefit Nike over the long haul.

After all, Nike has made a key priority of growing its direct-to-consumer business. Stuck-at-home consumers pivoting to online shopping likely will keep shopping directly from Nike. That keeps Nike from splitting profits with retailers like Dick’s Sporting Goods (NYSE:DKS), boosting both growth and profit margins going forward.

There’s also a potential competitive benefit. Under Armour (NYSE:UA, NYSE:UAA) at one point looked like a potential Nike rival. But that company is a mess. The pandemic undercuts any hopes for a turnaround there.

Those benefits are only part of the broader story, however. That story is simple: Nike is one of the best companies in the world. A pandemic that hits results for a quarter, or even multiple quarters, doesn’t change that fact.

And for 40 years, investors who have owned Nike stock haven’t been disappointed. That’s doubly true for those who bought the stock on a dip. As the disclaimer goes, past performance doesn’t guarantee future results. But I personally don’t believe this time will be any different.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


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