Nike Earnings Preview: What Might Be Expected From Q4?

Nike reports fourth-quarter earnings after the closing bell on Thursday, June 28. Here’s a look at what’s been going on at the footwear and apparel maker.

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Nike (NKE) reports fourth-quarter earnings after the closing bell on Thursday, June 28.  

The stock had been trading in a narrower range between $50 and $60 for much of 2016 and 2017. Then, After hitting a 52-week low of $50.35 in October 2017, NKE started to trend upwards and reached a new 52-week high of $75.91 a few weeks ago.

In the weeks leading up to its upcoming earnings report, NKE has received some analyst upgrades and price target increases. Several of the analysts cited signs of improvements in the North America market, which has been heavily promotional and competitive in recent years amid a string of bankruptcies across major sporting goods retailers.  

For Q4, NKE is expected to report adjusted EPS of $0.64 on revenue of $9.4 billion, according to third-party consensus analyst estimates.  On last quarter’s earnings call, management said it expects revenue growth to be in the high single-digit range. In the same quarter last year, NKE reported adjusted EPS of $0.60 on revenue of $8.7 billion.  

When the company last reported, NKE’s North America revenue decreased 6% year over year to $3.57 billion, while its other regions grew at a double-digit pace. Europe, Middle East and Africa revenue increased 19% to $2.3 billion, China revenue was up 24% to $1.34 billion, and the Asia Pacific and Latin America region’s revenue increased 13% to $1.27 billion. Revenue in the company’s smallest division, Converse, declined 3% to $483 million.  

At the same time, gross margins declined 70 basis points to 43.8% in Q3, which management said was largely a result of foreign exchange headwinds, offset by slightly lower product costs. NKE’s declining gross margins have been a cause of concern among analysts in the past. However, some analysts have said they think more favorable foreign exchange rate trends, combined with higher direct-to-consumer sales and improvements in average selling prices could help turn around the declines in Q4.  

One area that some analysts have expressed concern about is the potential impact of tariffs escalating between the U.S. and other countries. So far, footwear hasn’t been targeted in a major way, but footwear trade organizations have expressed concerns that the industry could be impacted since both Europe and Asia, specifically China, are important markets from a sales and manufacturing perspective.  

Nike 2018 Stock Chart

Nike 2018 StockChart. NKE hit a new all-time high of $75.91 on June 7. The stock got close to that level again on June 15, but it has pulled back a bit since then, along with the broader markets. So far this year, shares are up 14.29% year to date. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Nike Options Trading Activity

The stock set a new all-time high of $75.91 on June 7. Since the beginning of June, the stock has brushed up against $76 twice but it hasn’t been able to break through that level. Ahead of earnings, shares have pulled back to the mid-$72 range.

Around the upcoming earnings release, option traders have priced in about a 4.8% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. As of this morning, implied volatility was at the 80th percentile.  

In short-term trading at the June 29 weekly expiration, volume on the call side has been concentrated at the 72 strike price, while volume on the put side has been heavier at the 68 and 70 strikes.  

At the July 20 monthly expiration, there hasn’t been a lot of trading that stands out. On the call side, recent volume has been concentrated at the 72.5 strike price, right at the money. Trading has been lighter on the put side, and mostly spread out around the 67.5 to 70 strike prices.  

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time. 

Looking Ahead

The final reading on U.S. first-quarter GDP comes out Thursday morning and, next week, June’s employment report from the Bureau of Labor Statistics is released Friday morning.  

It’s still pretty quiet as far as earnings goes, and Q2 earnings season will kick into high gear starting with results from JP Morgan (JPM), Wells Fargo (WFC) and Citigroup (C) on Friday, July 13. For a look at what else is going on, check out today’s Market Update if you have time.  

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