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Can Consumer Direct Offense Boost NIKE's (NKE) Q3 Earnings?

Zacks Equity Research

NIKE Inc. NKE is slated to release third-quarter fiscal 2019 results on Mar 21. The question lingering in investors’ minds is whether this leading sports apparel retailer will be able to post positive earnings surprise in the quarter to be reported.

In the last reported quarter, the company delivered a positive earnings surprise of nearly 15.6%. Moreover, it maintained a spectacular earnings record for more than three years, delivering positive earnings surprises for 26 straight quarters. In the trailing four quarters, the company recorded average positive earnings surprise of 15.6%. Let’s see how things are shaping up prior to this announcement.

NIKE, Inc. Price and EPS Surprise

NIKE, Inc. Price and EPS Surprise | NIKE, Inc. Quote

What to Expect?

The Zacks Consensus Estimate for the quarter under review is 63 cents, reflecting year-over-year decline of 7.4%. We note that the Zacks Consensus Estimate for the fiscal third quarter remained unchanged in the past 30 days.

Moreover, NIKE outperformed the industry in the past month, indicating a positive sentiment ahead of the earnings release. Shares of the company have increased 0.7%, against the industry’s decline of 0.3%. Additionally, its shares have witnessed growth of 29.5% in the past year.

Factors at Play

NIKE’s strong earnings track record is supported by the solid execution of Consumer Direct Offense through innovation and focus on direct-to-customer business. The company’s performance graph is influenced by strength in international and NIKE Direct businesses alongside momentum in North America. These factors should continue to drive top and bottom line performances in the to-be-reported quarter

Notably, NIKE’s North America business returned to healthy, sustainable growth in fourth-quarter fiscal 2018. The momentum continued in the first and second quarters of fiscal 2019, registering revenue growth of 6% and 9%, respectively. Solid growth across footwear and apparel, driven by innovative platforms, and strong owned and partnered Digital growth, bolstered the segment’s performance. Moreover, the company’s Jordan Brand is witnessing momentum, with double-digit growth in the fiscal second quarter.

Looking ahead, the company expects the momentum in North America to continue in fiscal 2019 and beyond. The company targets mid-single-digit revenue growth in North America in the next five years.

Through its Consumer Direct Offense strategy, the company is building momentum across its operating regions by making the right product available at the right time and establishing a direct connection with consumers. NIKE is focused on the key aspects of its triple-double strategy — 2x innovation, 2x direct and 2x speed. These efforts are likely to benefit the company’s performance in fiscal third quarter.

However, higher SG&A expenses from increased demand creation expenses and operating overheads are likely to remain a drag. Further, the unfavorable currency environment due to the global trade and geopolitical dynamics is likely to weigh on the company’s sales.

Expectations for the Upcoming Quarter

For third-quarter fiscal 2019, the company expects robust currency-neutral revenue growth in high-single digits. However, taking into account the FX scenario, NIKE expects reported revenues to be about 4 points lower than the anticipated currency-neutral revenue growth.

Gross margin for the fiscal third quarter is expected to be on par with the fiscal 2019 expansion. Moreover, SG&A expenses are expected to increase in the low-double-digit range, driven by strategic investments. Other expenses, net of interest expenses, are likely to be $30-$40 million.

The Zacks Consensus Estimate for fiscal third-quarter revenues is $9.5 billion, reflecting an increase of 5.7% from the year-ago quarter. Moreover, revenue estimates for North America are $3,869 million, reflecting 8.3% increase from the year-ago quarter.

What the Zacks Model Unveils

Our proven model conclusively shows that NIKE is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

NIKE currently has a Zacks Rank #2 and an Earnings ESP of 18.42%, which suggests a beat in the upcoming quarter.

Other Stocks Poised to Beat Earnings Estimates

Here are some other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Columbia Sportswear Company COLM has an Earnings ESP of +2.59% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Michaels Companies Inc. MIK has an Earnings ESP of +0.93% and a Zacks Rank #3.

G-III Apparel Group, Ltd. GIII currently has an Earnings ESP of +0.92% and a Zacks Rank #3.

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