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Buy Nike Stock Ahead of Q1 Earnings, Amid LULU & Adidas Competition?

Benjamin Rains

Shares of German sportswear power Adidas ADDYY and upstart athleisure standout Lululemon LULU have both crushed Nike NKE stock in 2019. Lululemon is clearly at a much different stage than its larger peers, but Adidas is even older than its U.S. rival.

Therefore, investors need to decide if NKE stock looks like a buy heading into its Q1 2020 earnings results that are due out on September 24.

Retail & Rival Overview

Retail can be a fickle business, but the best firms not only adapt to changing styles and shopping patterns, they create innovation and trends. Once powerful department stores such as Macy’s M and Nordstrom JWN have seemingly failed to meet the demands of the Amazon AMZN age, while Walmart WMT and Target TGT are ready to thrive.

Nike doesn’t compete with these firms, though its clothing and shoes are mainstays at Nordstrom and other wholesaler-focused retailers. Adidas is Nike’s largest direct competitor and has been able to surge over the last five years through more compelling off-the-court offerings and high-profile collaborations.

Meanwhile, Lululemon has cemented its position as a hip, higher-end option. The Vancouver, Canada-based firm is now part of a group that also includes Puma and others, all trying to grab more sportswear market share. LULU has done what Under Armour UAA has failed to do: successfully translate its gym-focused offerings into fashion.

 

 

 

 

Nike’s Pitch

Despite Lululemon’s growth, the firm is only expected to pull in $3.68 billion in revenue this year. Adidas is projected to post sales of $26.43 billion in its current fiscal year. Nike posted Q4 fiscal 2019 revenue of $10.2 billion on June 27, with full-year revenue up 7% to $39.1 billion.

We can, however, see that NKE stock has fallen far behind ADDYY and LULU over the last five years—during the last decade Nike shares have slightly outpaced Adidas. Over the past 12 months, Nike stock has climbed 5%, against the S&P 500’s 2% climb and Adidas and Lululemon’s roughly 25% expansion. Year-to-date, this difference is even wider. Nonetheless, Nike appears attractive for an array of reasons.

First, Nike, like everyone else, has pushed headfirst into digital. The Beaverton, Oregon-based firm expects its digital division will make up 30% of the company’s total business by 2023, compared to roughly 15% at the moment. Nike reportedly invested over $1 billion in its apps and other capabilities over the past year, which includes digital-focused supply-chain updates, RFID tags, and more.

The company in early August purchased “retail predictive analytics and demand sensing” firm, Celect. Nike noted that Celect will play a role in its broader Consumer Direct Offense strategy. Nike’s direct-to-consumer future, which also includes an insane social media presence across platforms such as Instagram FB, isn’t just about e-commerce. The company continues to roll out in-store innovations in cities that it views as key to creating cultural influence around the globe.

Nike remains a powerhouse in the two biggest international sports, soccer and basketball, and just got into e-sports uniforms. In the U.S., the firm is also the official apparel sponsor of the NFL. On top of that, Nike’s fashion-focused sportswear unit is booming, as is the Jordan brand, up 21% and 12%, respectively last year on a currency neutral basis—with running up 4% and basketball up 9%.

Q1 Outlook & Beyond

Moving on, our current Zacks Consensus Estimate calls for the company’s Q1 fiscal 2020 revenue to pop 5% from the year-ago period to reach $10.45 billion. This would top Q4’s 4% growth.

It is important to note that Nike does roughly 60% of its business outside of North America, with around 15% to 20% coming from Greater China. Therefore, currency swings greatly impact Nike. In fact, the sportswear firm’s full-year revenue jumped 7% last year but climbed 11% excluding currency changes.

Meanwhile, Nike’s fiscal 2020 sales are projected to jump 7.9% to hit $42.21 billion, with 2021 expected to come in 8.4% higher at $45.74 billion. Both of these figures represent larger growth than Nike has posted in each of the past four years. Wall Street will likely be more than pleased with these kinds of growth figures, as they help show that the company’s digital initiatives and broader direct-to-consumer push are paying off in a big way.

At the bottom end of the income statement, Nike is projected to post adjusted Q1 earnings of $0.71 per share. This would mark a 6% climb and look far better than Q4’s 10% decline—that also represented its first earnings miss in forever.

Peeking ahead, Nike’s full-year fiscal 2020 earnings are projected to surge 16.5%, which would come on top of last year’s overall earnings growth that came despite Q4’s downturn. Plus, NKE’s fiscal 2021 EPS figure is projected to climb 18% above our current-year projection.

 

 

 

 

Bottom Line

NKE is trading at a lower forward earnings multiple at the moment than it has over the past 12 months, despite the fact that its stock is up 6% and rest a few dollars off its 52-week highs at $86.83—as of the close of regular trading Tuesday. Nike also holds an average broker rating of in of 1.76 (1=Buy, 5= Sell), against its industry’s 2.0 average.

Nike is also part of our Shoes and Retail Apparel industry, which rests in the top 16% of our 255 Zacks industries. This should help calm some U.S.-China trade war fears. Plus, analysts have hopefully already priced-in how tariffs are likely to impact Nike’s business, though investors need to pay close attention to any updates.

On top of that, Nike pays an annualized dividend of $0.88 per share, for a yield of 1.0% at the moment (10-year U.S. Treasurys rests at 1.73%). Nike is a Zacks Rank #3 (Hold) that sports an “A” grade for Growth in our Style Scores system. NKE certainly appears to be a stock worth considering, that could surge based on its strong, direct-to-consumer-driven growth outlook.

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