Nike (NKE) 2nd Quarter Earnings: What To Expect

Global athletic footwear and apparel giant Nike (NKE) is set to report second-quarter fiscal 2019 earnings results after the closing bell Thursday, and investors will be carefully assessing the company’s direct-to-consumer business.

Since reaching an intra-day all-time high of $86.04 prior to the Q1 report, Nike shares have fallen almost 20% this quarter alone, compared to the 12% drop in the S&P 500 index. Rising trade tensions between the U.S. and China — the company’s second-largest market — has raised concerns about the company’s growth prospects in the region.

Meanwhile, the pullback in the stock puts Nike at about 20% discount to analysts’ consensus price target near $87. Sam Poser, an analyst at Susquehanna who has a $100 price target on the stock, is bullish on the company, telling investors to “buy Nike into earnings.” Poser points out that the company’s revenues are on the rise and Nike is steadily “gaining market share across channels and geographies.” On Thursday, the company’s results will determine which camp is right: Investors who sold the stock ahead of earnings or those, like Poser, who see strong value.

For the quarter that ended in November, Wall Street expects the Oregon-based company to earn 46 cents per share on revenue of $9.17 billion. These estimates compare to the year-ago quarter when earnings came to 46 cents per share on revenue of $8.55 billion. For the full year, ending in June 2019, earnings are expected to rise 11% year over year to $2.65 per share, while revenue of $39.13 billion would mark a 7.5% increase year over year.

The numbers for the quarter are not expected to be breathtaking, particularly on the bottom line, which calls for breakeven results year over year. While the company has benefited from, among other things, a freshened inventory that no longer relies on price cuts to push sales, Nike’s sales in North America has been weak. Meanwhile, profits margins have narrowed in recent quarters. The company's gross margin rate in Q1 came in at 44.2% of sales. Not only was that below the 44.3% analysts were looking for, but it also declined from 43.7% a year ago.

With these factors in play, analysts on Thursday will be looking for the company to provide some level of confidence heading into 2019. One of the key areas will be the company’s direct-to-consumer (DTC) business, which in recent quarters has benefited from healthy price trends. The DTC business, which achieves higher margins than its shipments to wholesalers, is one way the company is working to improve the bottom line. Plus, it allows Nike to control much of the consumer shopping experience.

The success of the DTC business, combined with its recent partnership with Amazon (AMZN), should boost gross margins for the next several quarters. But as with every initiative we’ve mentioned, Wall Street on Thursday will want to see some evidence in the numbers that Nike is executing. Only then will Wall Street revise the company’s estimates upward. That said, as a value investor, Nike shares — despite what it reveals Thursday — are too attractive at this level to pass up.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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