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Things You Must Know Before NIKE's (NKE) Q1 Earnings Results

Zacks Equity Research

NIKE Inc. NKE is slated to release first-quarter fiscal 2020 results on Sep 24. The question lingering in investors’ minds is whether this leading sports apparel retailer will be able to deliver positive earnings surprise in the quarter to be reported.

In the last reported quarter, the company delivered a negative earnings surprise of nearly 6.1%. This breached its otherwise spectacular earnings record. Notably, the earnings miss in fourth-quarter fiscal 2019 marked its first negative surprise, after 28 straight beats. In the trailing four quarters, the company recorded average positive earnings surprise of 6.4%. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The Zacks Consensus Estimate for the company’s earnings for the quarter under review is pegged at 71 cents, reflecting year-over-year growth of nearly 6%. We note that the Zacks Consensus Estimate for revenues for the fiscal first quarter has remained unchanged in the past 30 days.

NIKE, Inc. Price and EPS Surprise

 

NIKE, Inc. Price and EPS Surprise

NIKE, Inc. price-eps-surprise | NIKE, Inc. Quote

Moreover, NIKE has outperformed the broader sector in the past month, indicating a positive sentiment ahead of the earnings release. During the same period, shares of the company have gained 7.6% compared with the Consumer Discretionary sector’s growth of 4.9%. Additionally, shares of NIKE have witnessed an improvement of 17.8% year to date.

 


Factors at Play

Despite reporting an earnings miss in the last reported quarter, the company’s strong earnings and sales track record is supported by the solid execution of Consumer Direct Offense through innovation and focus on direct-to-customer business. NIKE’s performance graph is also influenced by strength in international and NIKE Direct businesses alongside momentum in North America. The company has recorded top-line beat in the past nine straight quarters. These factors should continue to drive its 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 throughout fiscal 2019, with revenue growth of 6% in the first quarter, 9% in the second quarter, and 7% in both third and fourth quarters. Continued growth in NIKE Digital and significant share gains across its wholesale partners boosted the segment’s performance. Further, growth was driven by continued innovation in footwear and strong demand in apparel. The company’s wholesale and NIKE Digital businesses witnessed double-digit growth in North America.

Further, NIKE app revenues in North America are witnessing triple-digit growth. The company expects the momentum in North America to continue, driven by strong pipeline of innovative products, brand recognition and creation of digitally-led consumer experiences. Synergies from this business should contribute meaningfully to top-line growth again in first-quarter fiscal 2020.

Moreover, the company remains focused on accelerating digital advantage as part of capitalizing on its 2X Direct strategy, with the Consumer Direct Offense plan. It demonstrated strong progress on this strategy in fiscal 2019, with robust digital growth within Direct. NIKE also continues to leverage on its mobile apps, which are part of digital growth.

In fiscal 2019, the company invested more than $1 billion in new capabilities and consumer concepts. This included significant investments in the sneakers app, the NIKE app, new store concepts that leverage digital, NIKE Plus membership platform, and enterprise-wide data and analytics capabilities that are likely to serve consumers in new and better ways. Notably, the NIKE Direct business drove nearly 50% of incremental revenue growth in fiscal 2019, with 35% currency-neutral growth in NIKE digital.

The company expects digital commerce, own and partnered to account for at least 30% of sales by 2023. Looking ahead, it expects to expand the digital footprint, with the launch of NIKE app in 13 additional countries in EMEA, Greater China and across APLA in fiscal 2020.

Additionally, it will continue to invest in new store concepts that leverage digital, as clear from investments in two new innovative stores in New York and Shanghai. Further, it is investing in the smaller digitally enhanced store format NIKE Live and the NIKE Plus membership platform. Continued investments in digital platforms position the company for increased profitability in the fiscal first quarter and beyond.

However, higher SG&A expenses from increased demand creation expenses and operating overheads are likely to remain a drag. Further, higher product costs and supply-chain investments continue to offset gross margin expansion in the past few quarters. The unfavorable currency environment due to the global trade and geopolitical dynamics are also likely to weigh on the company’s sales.

Expectations for Upcoming Quarter & Fiscal 2020

NIKE expects to continue investing in key capabilities to aid digital transformation and deliver robust growth in fiscal 2020 and beyond. It expects results for fiscal 2020 to be driven by brand recognition, robust innovation pipeline, and positive response from Nike Direct and wholesale partners.  The company expects to witness revenue growth in a high-single digit and gross margin expansion in fiscal 2020. Further, it anticipates delivering broad-based growth across all geographies, which should be within long-term targets.

For first-quarter fiscal 2020, the company expects revenue growth to be in line to slightly above the level witnessed in fourth-quarter fiscal 2019. On a currency-neutral basis, revenue growth is expected to be in a high-single digit.

On the cost and margin front, the company expects gross margin to expand 50 bps in fiscal 2020. However, gross margin growth for the year is likely to be partly offset by currency headwinds, supply-chain investments such as RFID and expansion of Air manufacturing innovation. These factors are likely to mar gross margin by about 50 bps, which is included in the company’s guidance. Gross margin for the fiscal first quarter is estimated to be flat to expand 25 bps, fueled by robust growth in NIKE Direct and strong full-price sales.

Moreover, the company expects only slight SG&A leverage in fiscal 2020 as gains from productivity initiatives will be partly offset by costs related to investments. It expects SG&A expenses to increase in line with revenue growth in fiscal 2020. In the fiscal first quarter, the company expects SG&A expenses to increase in a high-single digit, in line with currency-neutral revenue growth.

Further, we expect NIKE’s top and bottom-line performances in first-quarter fiscal 2020 to be dampened by adverse currency rates. In the fiscal first quarter, the company expects unfavorable currency rates to hurt currency-neutral revenues by 4 percentage points. Additionally, currency headwinds are expected to mar gross margin by 50-70 bps in the fiscal first quarter.

What the Zacks Model Unveils

Our proven model does not conclusively predict 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 an Earnings ESP of +2.82% and a Zacks Rank #4 (Sell). While a positive ESP raises optimism, a negative Rank makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

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

Callaway Golf Company ELY currently has an Earnings ESP of +4.35% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hasbro, Inc. HAS presently has an Earnings ESP of +7.34% and a Zacks Rank #2.

Costco Wholesale Corporation COST currently has an Earnings ESP of +0.39% and a Zacks Rank #3.

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