Nike Earnings Ahead, Can North American Growth Maintain Momentum?

Nike reports fiscal second-quarter earnings after market close on Thursday, Dec. 20. The athletic apparel giant’s North American sales rebounded in the past two quarters and analysts are expecting the same this quarter. Here’s a look at what else is going on at the company ahead of Thursday’s report.

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Nike (NKE) is scheduled to report fiscal second-quarter earnings after market close on Thursday, Dec. 20. 

For the quarter, NKE is expected to report EPS of $0.46, flat compared to last year, on revenue of $9.17 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 7.2% year over year.

The last time NKE reported, it beat on both the top and bottom-line. Continued double-digit growth in international sales and Nike direct-to-consumer, combined with sales momentum in North America, were some of the drivers management attributed the top-line growth to. 

Still, the beat last quarter didn’t seem to live up to expectations as shares dropped 4% in after-hours trading. One area many analysts and investors honed in on were gross margins, which were up 50 basis points to 44.2% in fiscal Q1. While that was an improvement, it’s still below the 45% to 46% range the company had achieved for several years.  

Can North America Keep up Growth Streak?

2016 and 2017 was a tough stretch for athletic companies as Sports Authority and several other major sporting goods retailers went out of business, flooding the market with discounted inventory at a time when consumer demand was already showing some weakness.  

NKE was no exception and the company posted sales declines in its core North America market for the past two fiscal years. NKE’s North America sales in fiscal 2018 declined 2% year over year to $14.86 billion, but the fourth quarter started to show signs of a rebound as sales were up 3% to $3.88 billion. 

In the first quarter of fiscal 2019, momentum had continued and sales in the region increased 6% year over year, to $4.15 billion. On the earnings call, CFO Andy Campion said it was “very strong sustainable growth in North America,” so analysts and investors are likely to be expecting a similarly strong performance this quarter. 

Some Questions About International 

Despite weakness in the North American market for NKE, its international segments had generated faster growth in the past that allowed the company to continue to grow its top-line at a faster pace. In fiscal Q1, sales in the Europe, Middle East and Africa (EMEA) region were up 11% year over year to $2.61 billion, Greater China sales increased 24% to $1.38 billion, and the Asia Pacific and Latin America (APLA) region delivered the slowest growth, up 7% to $1.27 billion. 

Now, after many quarters of analysts being concerned about North America, their attention has turned towards NKE’s international segments. Analysts have said they’re still widely expecting strong sales momentum from China, which has delivered double-digit revenue growth for 17 consecutive quarters. However, tariffs and global trade uncertainty have left some questioning the extent that this will impact NKE’s results, if at all, in a material way.

Another headwind is the strong U.S. dollar, which has continued to trend higher against many major currencies in the back half of 2018. Last quarter, management said they expected it to only be a slight headwind in fiscal q2. In fiscal Q1, NKE’s reports showed the impact of currency exchange had cut the APLA region’s revenue growth in half, while both the EMEA and Greater China benefitted from changes in exchange rates.  


Still Up. NKE has given up some ground since it hit an all-time high of $86.04 towards the end of September, but the stock is still up 10% year to date, outperforming both the S&P 500 and the Nasdaq Composite by a wide margin. Heading into earnings, the stock is trading around the $70 mark, a level of support since midyearChart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Nike Options Activity

Options traders have priced in a 6.1% ($4.37) stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 100th percentile as of this morning. 

In short-term trading at the Dec. 21 monthly expiration, calls have been active at the 72.5 strike price. On the put side there has been smattering of activity spread out across a range of strikes, mostly right around the money. 

Looking at the Jan. 18 monthly expiration, calls have been active in recent trading at the 72.5 and 75 strike prices, while open interest is highest at the 65-strike and 80-strike. On the put side, recent activity has been spread out between the 62.5 strike and the 70 strike. 

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.

Good Trading,

JJ

@TDAJJKinahan

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