Nike Inc (ticker: NKE) is still the king of athletic apparel. But that title has provided little comfort to shareholders, who have suffered underperformance so far in 2017, not to mention more than 20 percent losses in NKE stock since late 2015.
They’ll certainly be looking for some sort of spark, then, when Nike reports its fiscal fourth-quarter and full-year earnings after the market closes Thursday.
The good news: Nike is a habitual expectations topper. The bad news: It might not matter.
The headline numbers. It was only a couple years ago that Nike was consistently delivering double-digit top-line growth. But sales expansion has decelerated, and now Wall Street regularly expects the kind of performances like the 4.8 percent revenue improvement that the pros have forecast for the fourth quarter. The pros see that $8.64 billion filtering down to a bottom line of 50 cents per share — a mere penny (2 percent) better than the year-ago result.
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The two things Nike has going for it? One, that’s a low bar to clear, and two, Nike doesn’t miss when it comes to quarterly earnings. NKE has posted profit beats every quarter since at least 2014. Thus, it’s likely investors and pundits alike will care more about how Nike performs compared to analysts’ whisper number for earnings, which is much loftier at 54 cents per share.
However, not everyone has full faith in Nike’s earnings-time invulnerability.
Confidence in Nike is waning. JPMorgan analyst Matthew Boss put some fear into Nike bulls on June 16, saying that things will get “worse before [they get] better” and predicting that NKE will miss expectations for the 2018 fiscal year.
Boss downgraded NKE stock from “overweight” to “neutral,” and is predicting fiscal earnings of $2.40 per share, well under the analyst consensus of $2.49; thus, he’s calling for a rare earnings miss next year, which naturally would have to include a quarterly miss or two to get there.
While that’s for the 2018 fiscal year, many of the issues built into that forecast are plaguing Nike today.
Competitors such as Under Armour (UAA, UA) and Adidas are eating into the company’s revenue growth, domestically and in Europe and China. Piper Jaffray’s Erinn Murphy specifically called out Adidas’ digital efforts recently, saying it “eclipsed Nike’s in the most recent quarter in dollar terms.” Meanwhile, the company is heavily discounting its wares across both its wholesale operations and at retailers such as Foot Locker ( FL) and JC Penney Co. ( JCP), which is wearing on margins.
That’s the current landscape, and it likely points to a rough fourth quarter as well as the potential for disappointing 2018 guidance. But Nike isn’t exactly standing still.
Why NKE could turn things around. Nike’s biggest splash in the past few months was last week’s report by Goldman Sachs claiming that the athletic apparel company was nearing a deal to sell its wares directly via Amazon.com ( AMZN) — an announcement that sent already hurting brick-and-mortar retailers closer to the ground.
Whether that comes to pass remains to be seen, but if Nike does make the move, it could result in $300 million to $500 million in additional U.S. sales annually — more than 1 percent of last year’s $32.3 billion in revenues.
And the day before Boss’ downgrade, Nike announced a major operational reorganization that included a 2 percent reduction in its global workforce.
The primary goal of Nike’s new “consumer direct offense” is to target consumers in 12 key cities — New York, London, Shanghai, Beijing, Los Angeles, Tokyo, Paris, Berlin, Mexico City, Barcelona, Seoul and Milan — across 10 countries that the company believes will represent more than 80 percent of its projected growth through 2020.
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Coupled with CEO Mark Parker’s “edit to amplify” strategy — where Nike enhances focus on the 75 percent of its styles that generate 99 percent of its sales, and cuts out the other 25 percent — these initiatives could bolster margins and fuel a more efficient Nike machine.
These developments are creating a new bullish story that spurred Morgan Stanley’s Jay Sole to dub Thursday’s report a “buy the news” event. While he believes weak 2018 guidance is coming, he thinks all the pessimism is baked in. So once Nike swallows its medicine, bulls will be allowed to drive NKE stock higher once more on hopes that it has its turnaround plan.
More Earnings in Focus
Rite Aid Corp. (RAD). Rite Aid’s regular earnings report hasn’t meant too much over the past few quarters, as Wall Street had largely expected the company to be swallowed whole by Walgreens Boots Alliance ( WBA). However, the Federal Trade Commisson’s Tad Lipsky reportedly is recommending that the FTC block the merger, possibly as soon as this week, though it technically has until a July 7 deadline. That puts Rite Aid’s operational results back in the spotlight come Thursday morning, and there’s not much to love there. RAD is expected to flip from a penny-per-share profit in the first quarter of last year to a penny loss on essentially flat revenues of $8.17 billion.
Micron Technology (MU). Micron enters Thursday evening’s fiscal third quarter report with a full head of steam. MU shares are up 45 percent in 2017 and 140 percent over the past 12 months, and if they keep pace, Micron realistically could reach multiyear highs above $36 set in late 2014. There are several reasons to believe the chipmaker is about to report another hot quarter — DRAM prices continue to rise, and gross margins continue to expand. However, Goldman Sachs downgraded MU stock last month on the idea that both those drivers are plenty priced in. Micron certainly has an eye-popping bar to clear — analysts on average are forecasting a flip from last year’s 8-cent loss to a $1.50 profit on an 86.6 percent top-line surge to $5.41 billion.
This Week’s Earnings Calendar
Monday. NovaGold Resources ( NG)
Tuesday. AeroVironment ( AVAV), Darden Restaurants ( DRI), KB Home ( KBH)
Wednesday. General Mills ( GIS), Monsanto Co. ( MON), Paychex ( PAYX), Pier 1 Imports ( PIR)
[See: 10 Smart-Beta ETFs That Will Help You Get Your Alpha.]
Thursday. American Outdoor Brands Corp. ( AOBC), Constellation Brands ( STZ), McCormick & Co. ( MKC), Walgreens Boots Alliance
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Nike Inc (NKE) Bulls Have to Play the Long Game originally appeared on usnews.com
