Will Soft Margin Trends Weigh on NIKE's (NKE) Q3 Earnings?

NIKE Inc.NKE is slated to release third-quarter fiscal 2018 results on Mar 22. The question lingering in investors' minds is whether this leading sports apparel retailer will be able to post positive earnings surprise in the quarter to be reported.

In the last quarter, the company delivered a positive earnings surprise of nearly 18%. Moreover, it has a spectacular positive earnings surprise record for more than three years, delivering positive earnings surprises for 22 straight quarters. In the trailing four quarters, the company recorded an average positive earnings surprise of 22.5%. Let's see how things are shaping up prior to this announcement.

NIKE, Inc. Price, Consensus and EPS Surprise

NIKE, Inc. Price, Consensus and EPS Surprise | NIKE, Inc. Quote

What to Expect?

The Zacks Consensus Estimate for the quarter under review is 52 cents, reflecting year-over-year decline of 23.5%. We note that the Zacks Consensus Estimate for the third quarter has been going down in the last seven days. However, analysts polled by Zacks expect revenues of $8.8 billion, reflecting an increase of 4.7% from the year-ago quarter.

Moreover, NIKE underperformed the Consumer Discretionary sector in the past month, indicating a negative sentiment ahead of the earnings release. Its shares declined 3%, wider than the sector's fall of 0.8%.

Factors at Play

NIKE's robust growth and innovation efforts have been reflected in its robust earnings surprise trend. Additionally, persistent growth in international locations and global NIKE Direct business, along with solid demand for the NIKE brand, has been boosting top line.

While the company's overall sales performance remains impressive, sales in its key North American market continues to suffer. The soft sales in North America can be attributed to the lackluster product assortments, increased promotions due to the growth of e-commerce and intensified competition. Moreover, the company's wholesale business in the region has been impacted by increased focus on online sales. We believe the overall environment is likely to remain promotional in North America, hurting the results in this segment. These trends in North America make us cautious about the company's overall performance.

Backed by the continued softness in North America, NIKE retained its previously stated soft outlook for fiscal 2018 and provided a bleak third-quarter view. The company expects near-term results to be hurt by currency headwinds and a promotional retail environment across the United States.

For fiscal 2018, reported revenues are anticipated to increase mid-single digits. In third-quarter fiscal 2018, the company anticipates revenues to be flat to slightly below the second-quarter level due to the timing of new product launches coming late in the quarter. The company expects the strength in international business to be partly mitigated by decline in North America and in the Converse segment.

Furthermore, NIKE has been witnessing strained margins for a few quarters now. Gross margin in the fiscal second-quarter shriveled due to foreign currency headwinds and the rise in product costs per unit. Moreover, higher SG&A expenses can be attributed to the increase in operating overheads and demand creation expenses.

Going forward, the company expects gross margin to contract about 50-100 bps in fiscal 2018 and 125-175 bps in the third quarter. While the company anticipates the underlying drivers for gross margin to improve in the third quarter, currency headwinds and a promotional retail environment across the United States is likely to outweigh margin growth.

Reported SG&A for the fiscal is anticipated to increase in the mid-single-digit range, including prudent operating overhead management alongside investing in its Consumer Direct offense. In third-quarter fiscal 2018, SG&A expense is anticipated to increase low-double digits due to increased demand creation opportunities and higher operating overheads to boost digital capabilities.

Driven by the softness in North American sales and the pressure on margins, we remain skeptical about the company's performance in the upcoming release.

What the Zacks Model Unveils

Our proven model does not show 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 has an Earnings ESP of -0.11%. Although its Zacks Rank #3 increases the predictive power of ESP, the stock's negative ESP makes earnings prediction difficult.

Stocks Poised to Beat Earnings Estimates

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

Guess? Inc. GES has an Earnings ESP of +1.25% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

The Michaels Companies Inc. MIK has an Earnings ESP of +2.02% and a Zacks Rank #2.

G-III Apparel Group Ltd. GIII has an Earnings ESP of +22.45% and a Zacks Rank #2.

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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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