North America

Earnings Preview: Nike Q2 2018 (NKE)

By: Craig Bowles

Overview

Nike Corporation (NKE) is slated to report 2Q 2018 earnings after the close on Thursday, December 21st. The earnings release is expected at approximately 4:15 p.m. ET with a 5:00 p.m. conference call webcast available at Nike Investor Relations. The athletic footwear and apparel maker’s brand alone is valued at $10.7 billion, making it the most valuable brand among sports businesses. Nike is an S&P 500 component and was added to the Dow Industrial Average in 2013, so results have an increased market-moving impact. Nike stock split two-for-one on December 24th, 2015.

Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): The Street estimate is $0.40 (range $0.35 to $0.58) (Source: Yahoo! Finance). Consensus was $0.54 three months ago.
  • Revenues: Analysts expect an increase of 2.6% y/y to $8.39 bln (range $8.27 bln to $8.48 bln).
  • Future Orders: The company did not report this value last quarter.
  • Price/Earnings of 26.1 compares to a 5-year average of 26.0; Price/Book of 8.3 compares to a 5-year average of 6.3; Price/Sales of 3.0 compares to a 5-year average of 2.7; Price/Cash Flow of 30.1 compares to a 5-year average of 25.6. Dividend yield of 1.2% compares to a 5-year average of 1.2%.
  • Analyst view Nike with 20 Buy ratings, 19 Hold, and 2 Sell, according to MarketBeat.com.
  • Nike insiders sold 116,867 shares over the last three months but bought a net 4,204,737 shares in the past year. (source: NASDAQ.com) The company has a four-year $12 billion share repurchase program that runs through Q32020 following the previous $8 billion and $5 billion buyback programs that also ran four years.
  • Nike results could impact other athletic footwear companies, such as Adidas (ADDYY), Finish Line (FINL), Shoe Carnival (SCVL), Steven Madden (SHOO), Foot Locker (FL), DICK’S Sporting Goods (DKS), Wolverine World Wide (WWW) and Skechers (SKX). Performance apparel makers Under Armour (UA) and lululemon athletica (LULU) could be impacted, as well.
  • Nike shares have a 1-day average price change on earnings of 4.34%. Options are pricing in an implied move of 5.36% off earnings.

Recent News

  • 12/08: Guggenheim reiterated a Buy rating on Nike on North American retail improvement and calls the company a “best idea” while listing five reasons why the stock has an appealing risk-reward, according to a post on Barron’s.com.
  • 12/07: Cowen & Co. rates Nike at Market Perform and doesn’t lost much ground to rivals Adidas and Under Armour and having the highest return on invested capital brand (39%) in global retail deserves a premium valuation, according to a post on Barron’s.com.
  • 12/05: At Nike’s investor’s day presentation, Nike’s chief operating officer presented the company’s “triple-double” strategy, which focuses on driving growth in three areas where it expects to double its performance: innovation in materials, speed in its automation processes, and direct to consumer sales, according to a post on Fool.com.
  • 11/28: HBSC downgraded Nike to Hold from Buy citing “blurred visibility” in the U.S. market. 60% of Nike sales are currently from “undifferentiated” wholesale channels, which should decline to 20% over the next five years as its direct-to-consumer sales rise from 40% to 80%, according to a post on MarketWatch.com.
  • 11/17: Foot Locker announced an elevated partnership model with Nike.
  • 11/15: In the wake of the Paradise Papers revelations about tax avoidance, the AFL-CIO and Domini Impact Investments LLC, a provider of socially responsible mutual funds, is asking Nike to adopt formal tax practice principles, according to a post on TheStreet.com.
  • 10/25: At Nike’s investor’s day presentation, Chief Executive Officer Mark Parker forecasted that over the next five years annual sales and earnings per share will climb at a percentage in the high single digits and in the mid-teens respectively. Parker attributed the predicted growth to overseas markets and direct sales to consumers, according to a post on Bloomberg.com.

Summary

After Nike cut their workforce, eliminated a quarter of its shoe styles, and cut the CEO’s nearly $50 million pay, analysts remain split on their optimism the company’s future. The dollar strength and weakness appears to have been less of an issue than competition led by Adidas’ improving North American momentum. Nike’s slowing future orders led by North America turned into declines and is an obvious worry for future revenue, so the company no longer reports this measure. Optimists cite the summer of 2018’s World Cup and the increased four-year stock buyback plan. Nike beat estimates by an average of 10c the past four quarters. Estimize consensus for an EPS of $0.46 on revenue of $8.438 bln compares to analyst consensus of $0.40 on revenue of $8.39 bln.

 

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