Nike Seen Avoiding Repeat of First Earnings Miss in Seven Years

(Bloomberg) -- Nike Inc.’s first-quarter results will be under a microscope following an earnings miss in the final period of fiscal 2019 -- the first shortfall in seven years.

Analysts are expecting an in-line quarterly report, supported by brand momentum and the athletic footwear and apparel maker’s efforts in both the digital channel and with speed-to-market initiatives. The momentum should be carried throughout the fiscal year, with the 2020 Summer Olympics in Tokyo as another catalyst.

A recent back-to-school survey by Stifel pointed to market-share gains for Nike in North America, the company’s largest market. Nike’s share of popularity in the upper price point of U.S. channels increased 13 percentage points year over year, analyst Jim Duffy said. But it’s not only in the higher-end product where Nike is excelling. Susquehanna’s Sam Poser has been touting Nike’s “compelling new product offerings, particularly in the moderate channel.”

Meanwhile, Nike’s recent purchase of data-science firm Celect shows the company isn’t about to slow down in its quest for dominance in digital capabilities. Executive commentary on digital capabilities will remain a topic of interest to investors. Management said on the fourth-quarter conference call in June that it will launch the Nike app in China, as well as in 13 new markets in EMEA in the first half of fiscal 2020.

Analysts did call out currency impact as a potential watch point in both the quarterly results and for the year.

Shares are up 19% so far this year, nearing their April 18 record intraday high of $90. The stock has outperformed Under Armour Inc. shares, but has trailed that of Adidas AG. Shares were 0.5% higher in early trading on Tuesday.

Here’s more of what analysts will be watching for in the release:

Susquehanna, Sam Poser

• Checks indicate Nike’s momentum across geographies, categories and channels is strong, and that product offerings in the moderate and better channels for the 2019 holiday season and spring 2020 are “more compelling than much of the current product”; digital remains a top priority
• Expects revenue in North America to once again exceed Street estimates as digital initiatives and increasing speed-to-market continue to evolve
  • Poser estimates North America revenue growth of 7.4% in the first quarter and 7.5% for fiscal 2020 vs Street consensus view of 5.2% growth and 5.9%, respectively
• Areas to watch that may negatively impact Street consensus: currency and higher SG&A
  • Poser doesn’t believe current Street SG&A estimates fully reflect the outsized marketing spend associated with the Tokyo Olympics
• Rates positive, price target $100

Bernstein, Jamie Merriman

• Continued shift to direct and digital sales should result in long-term margin expansion for Nike and improving ROIC
• While currency has become an even larger headwind to growth since Merriman last updated estimates, Bernstein’s checks have suggested continued product momentum for Nike, reinforcing expectations for strong constant currency growth
• She expects “very strong underlying gross margin expansion” to be offset by a 50-75 basis point currency headwind, which she expects to abate across the fiscal year, and supply chain investments
• Rates outperform, price target $104

Bloomberg Intelligence, Poonam Goyal

• Broad-based strength in shoes and sports apparel should drive “solid” sales and margin results
• Sees upside to the 7% same-store-sales gain consensus, in constant currency, led by momentum during the Women’s World Cup; 3 of 4 Nike sponsored teams made the finals, and women’s jersey sales surged 200% vs. 4 years ago
• Double-digit growth in the Jordan line, and updates for 75% of its assortment under $100 are sales catalysts

Stifel, Jim Duffy

• A strong product offering, including during back-to-school, and digital growth should enable Nike to deliver in line 1Q results, while “strong brand momentum and accelerated product releases beginning in 2Q support the outlook for solid and improving underlying fundamentals”
• Incremental FX headwinds since the last report may temper capacity for an increase to reported revenue guidance, but Duffy expects hedging activity protects earnings through fiscal 2020
• Rates buy, price target $96

Baird, Jonathan Komp

• Expects first-quarter results to be “near/slightly above” estimates and for management to reiterate its prior full-year forecast
• For the second quarter, Komp sees a “slight risk of cautious commentary” given a tougher year-over-year revenue comparison in North America and international, “though current consensus revenue and EPS look reasonable with NKE potentially set to start showing slight SG&A leverage”
• Rates neutral on valuation; price target $87

Just the Numbers

• 1Q EPS estimate 70c (range 66c to 73c)
• 1Q revenue estimate $10.44 billion (range $10.36 billion to $10.62 billion)
• 1Q gross margin estimate 44.4%
• 1Q North America rev. estimate $4.36 billion (Bloomberg MODL)
• 1Q EMEA rev. estimate $2.66 billion (MODL)
• 1Q Greater China rev. estimate $1.57 billion (MODL)
• 1Q Asia Pacific & Latin America rev. estimate $1.32 billion (MODL)
• 1Q pretax profit estimate $1.34 billion (range $1.27 billion to $1.40 billion): Bloomberg data

Data

• 24 buys, 8 holds, 2 sells; average price target $95 (7.5% upside from current price)
• Implied 1-day share move following earnings: 5.8%
• Shares rose after 6 of prior 12 earnings announcements
• Adjusted EPS beat estimates in 11 of past 12 quarters
• Shares up 0.1% in past 5 days vs SPX Index down 0.5%
• Shares up 4.1% in past year vs SPX Index up 2.5%

Timing

• Earnings release expected 4:15pm (New York time) Sept. 24
• Conference call website

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm, Jennifer Bissell-Linsk

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