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What's Next for Nike Stock & Why Lululemon (LULU) is a Buy Before Q4 Earnings

Benjamin Rains

 

Welcome to the latest episode of the Full-Court Finance podcast from Zacks Investment Research where Associate Stock Strategist Ben Rains breaks down Nike’s NKE Q3 fiscal 2019 financial results that led to a small selloff on the back of lower-than-expected sales in a key business. The episode then dives into what to expect from Lululemon’s LULU Q4 earnings.

Nike posted earnings of $0.68 a share last Thursday to top our $0.63 per share Zacks Consensus Estimate by 8%. But sometimes earnings beats aren’t enough to impress investors, especially for Nike which has a stellar history of bottom-line beats. With that said, the sportswear giant also saw its revenue jump 7% to reach $9.611 billion and surpass our estimate.

Shares of Nike likely slipped over 6% on Friday because the company underperformed Wall Street estimates for its always-vital North American unit. Nike’s sales in North America, which account for roughly 40% of total sales, popped 7%. However, Nike’s revenue in its home market fell just short of Wall Street expectations and marked a slowdown from Q2’s expansion. Despite the small miss, Nike proved its strength in the region as it continues to fight off rival Adidas ADDYY and blow away Under Armour UAA.

Meanwhile, Nike’s sales in China climbed by double-digits for the 19th straight quarter. The Oregon-based company’s sales in the world’s second-largest economy did come down from previous periods, but looked far stronger than the likes of Apple AAPL, Alibaba BABA, and many others in the region.

On top of that, Nike’s footwear sales popped 9% and its women’s business grew. And maybe most importantly, Nike’s direct-to-consumer unit expanded as it rolls out more digital and e-commerce offerings, along with new brick-and-mortar concepts. At a time when brands are built and people shop directly on Instagram FB, Nike’s reach looks as strong as ever. Meanwhile, Nike maintains relationships with Nordstrom JWN, Foot Locker FL, and Dick’s Sporting Goods DKS.

Moving on, Lululemon has forced Nike and others to deepen their athleisure offerings. Along with the Canadian-based company’s original yoga-inspired clothing, Lulu now sells men’s and women’s outwear for as much $600 as it tries to compete against Canada Goose GOOS, V.F. Corporation’s VFC The North Face, Columbia Sportswear COLM, and other higher-end brands. Lululemon has also expanded into shoes, accessories, as well as more work-appropriate and fashion-focused offerings for both men and women.

Lululemon's bigger push into menswear comes as Gap GPS and other firms such as Austin, Texas’ Outdoor Voices grow. Earlier this month, Lululemon signed NFL quarterback Nick Foles as its first men’s ambassador in an effort to attract consumers away from more traditional sportswear brands. Lululemon is also testing out a new loyalty program as retailers try to navigate the Amazon AMZN age.  

Looking ahead, Lululemon’s Q4 revenues are projected to jump 23.7% to reach $1.15 billion, which would top Q3’s 21% top-line growth. Lululemon is also currently a Zacks Rank #2 (Buy) based, in part, on its recent earnings estimate revision activity heading into its fourth-quarter earnings release, which is due out after the closing bell on Wednesday, March 27.

As a reminder, if you feel that we missed something, or if you have any topic suggestions, shoot us an email at podcast@zacks.com. Make sure to check out all of our other audio content at zacks.com/podcasts, and remember to subscribe and leave us a rating wherever you listen to your podcasts.

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