Nike Earnings Preview: Expect Strong Earnings Despite Certain Headwinds

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Nike (NYSE:NKE) is all set to deliver its Q2 earnings on the December 20th. (Fiscal years end with May.) Thus far in 2016, has delivered strong results all three quarters. In its most recent quarter (ended August 31st), the company posted strong numbers, beating consensus estimates in both revenues and earnings. Despite this, the stock price has fallen by almost 20% since the beginning for the year. The main reason for this is the consistent drop in future orders and loss of market share in the footwear business over the past few quarters.

Excluding currency fluctuations, the company has seen  future orders decrease by about 5% in the U.S. Overall the sportswear giant reported a 3% drop in future orders worldwide. Future orders are indicative of demand for Nike products and have a direct effect on sales. To put this into perspective: in 2015, 87% of Nike’s wholesale footwear shipments were made through future orders, as was 67% of Nike’s U.S. wholesale apparel. This news has shaken investor confidence as this the third straight quarter (and the lowest in five quarters) in which the company has reported future orders figures below analyst expectations.

Future Nike

Furthermore, as mentioned before, Nike has been losing market share in the footwear business. The company is facing increased competition from competitors like Under Armour and Adidas in the segment. Ever since signing Stephen Curry on, Under Armour has managed to grab a larger market share in the basketball footwear. The Curry series of basketball shoes have outsold Nike’s Jordan and LeBron series in the last few quarters, forcing the company to release cheaper models of its KD and LeBron shoes in an effort to regain some of the lost market share. This move is bound to affect margins.

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Adidas has primarily scored with fashion shoes promoted by celebrities such as Kanye West. In June, Adidas expanded its partnership with this artist, who moved to the company from Nike in 2013 due to creative differences. In the first quarter, Adidas managed to post a 31% increase in sales of footwear in North America, driven primarily by its Yeezy designs and retro shoes.

Despite this, we can expect Nike to showcase a stellar performance this quarter. Here’s why:

  • During November, Nike.com witnessed a massive uptick in web traffic. This is a typical movement given the Black Friday sales.   However, the uptick was much larger than the increases witnessed at Underarmour.com and Adidas.com. In addition, Nike led the board when it came to online search interest.
  • Popularity of Stephen Curry allowed the Under Armour stock to reach new heights over the past few years. However, it was noted at the beginning of the year that Stephen Curry’s fame had begun to dwindle. This trend appears to be continuing as online search interest for Curry has faltered dramatically following the 2016 NBA Finals, while LeBron James and Kevin Durant’s online search interest remained relatively constant.

  • Nike has invested heavily in reinventing the retail experience and their new concept stores are testament to this fact. The company opened a massive 55,000 square feet store in New York City’s prime Soho district. The store has generated considerable buzz and has led to immense traffic. Nike is opening another such store on Fifth Ave, and it promises to be even bigger and better. Both these moves are bound to help Nike’s brand awareness and brick-and-mortar traffic.

  • When it comes to college football playoff system, Nike is a perfect 12 for 12. For three consecutive years, the top four teams have been Nike sponsored teams. Though Reebok and Under Armour managed to nab a few school contracts over the last year, Nike still reigns supreme. This underscores Nike’s dominant position in markets outside of basketball.
  • In the previous final year (FY 2016), Nike managed to report an earnings per share of about $2.16. This number has grown by a notable average rate of about 12.6% per annum over the past decade. Further, we estimate this figure to reach about $3.91 in next five years, growing at a consistent CAGR of about 12.6%.

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  • Lastly, Nike is a brand that has ranked as one of the best in the world consistently for years together. The brand has become a household name and is synonymous with health and fitness, thanks to targeted and well thought out marketing. This has resulted in consistent premiums for the company for decades. For example, if one were to invest $100 in 2005, by 2014, the investment would appreciated to $460. This represents an average compound gain of about 20% per annum. One can expect the future of the company to remain bright.

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