Nike’s stock has been in high demand in 2019, not too much unlike the fanatical response to a re-release of The Air Jordan Bred 11 on Dec 14.
Most Wall Street analysts don’t think that appetite for Nike’s stock (NKE) will get tripped up in 2020, despite a new CEO in John Donahoe being at the helm. A period of rabid sneaker innovation, steady stock buybacks, a struggling rival in Under Armour (UA), solid demand in Europe and China and strong growth online has experts believing more upside in Nike’s stock is possible on top of the sterling 30% rally in 2019.
That would be impressive, however, considering Nike’s stock trades on a price-to-earnings multiple of 29 times forward earnings’ estimates. The broader market trades at about 18 times.
But hey, you have to pay up to own the best in breed inside a struggling retail landscape. And that’s what investors have been willing to do with Nike.
“Not much could stop Nike, not even Adidas could stop Nike,” UBS retail analyst Jay Sole said on Yahoo Finance’s The First Trade. “Barring a change in the macro economy, Nike’s innovation and their digital connectivity with consumers has been great. That has been the key to success.”
Nike will report its fiscal second quarter earnings after the market close on Dec. 19. Analysts such as Sole are expecting a solid quarter from Nike on the back of its improved product pipeline. Nike is seen earning 58 cents a share, according to estimates compiled by Yahoo Finance, up 12% from a year ago. Sales are projected to be $10.08 billion, an increase of 7.2% from last year.
Sole thinks Nike’s stock is likely to trade off its updated fiscal year 2020 outlook. Back in September, Nike outlined a fiscal year 2020 sales increase of “high single digits” year-over-year, slight gross profit margin expansion and operating expense growth in line with sales growth. The company’s guidance didn’t explicitly detail earnings guidance, but analysts implied it to be in a range of $2.85 to $3.09.
The current consensus estimate is $2.98 a share. To sustain Nike’s run, the Street probably wants to see Nike lift its sales and profit margin expectations.
Donahoe as CEO
One wildcard to the Nike story — even if most on Wall Street don’t see it that way — is Donahoe and how he will look to put his stamp on the business. Donahoe will take over for veteran Nike CEO Mark Parker on Jan. 13, 2020. Donahoe is a long-time Nike board member and led eBay and ServiceNow as CEO.
All CEOs — especially of Donahoe’s caliber — want to put their stamp on the business in their first year. Donahoe is viewed as a tech innovator that is unlikely to shake things up too much at Nike. But given Nike’s cultural issues internally that have surfaced this past year, one never knows what skeletons Donahoe will have to address forcefully.
“One reason he is the CEO is that he has been involved in strategy since he joined the board in 2014. What it says is that he is very much a digital person with a focus on e-commerce. That’s exactly where Nike is going,” Sole said.