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NIKE (NKE) Q4 Earnings to Suffer From Currency Headwinds

Zacks Equity Research

NIKE Inc. NKE is slated to release fourth-quarter fiscal 2019 results on Jun 27. 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 reported quarter, the company delivered a positive earnings surprise of nearly 7.9%. Moreover, it maintained a spectacular earnings record for more than three years, delivering positive earnings surprises for 27 straight quarters. In the trailing four quarters, the company recorded average positive earnings surprise of 9.8%. Let’s see how things are shaping up prior to this announcement.

NIKE, Inc. Price and EPS Surprise

 

NIKE, Inc. Price and EPS Surprise

NIKE, Inc. price-eps-surprise | NIKE, Inc. Quote

What to Expect?

The Zacks Consensus Estimate for the quarter under review is pegged at 67 cents, reflecting a year-over-year decline of 2.9%. We note that the Zacks Consensus Estimate for the fiscal fourth quarter has remained unchanged in the past 30 days.

Moreover, NIKE has outperformed the industry in the past month, indicating a positive sentiment ahead of the earnings release. Shares of the company have gained 1.7% compared with the industry’s growth of 0.2%. Additionally, its shares have witnessed an improvement of 12.9% in the past year.

 


Factors at Play

NIKE’s strong earnings track record is supported by the solid execution of Consumer Direct Offense through innovation and focus on direct-to-customer business. The company’s performance graph is also influenced by strength in international and NIKE Direct businesses alongside momentum in North America. These factors should continue to drive its top and bottom-line performances in the to-be-reported quarter.

Notably, NIKE’s North America business returned to healthy, sustainable growth in fourth-quarter fiscal 2018. The momentum continued in the last three quarters, registering revenue growth of 6%, 9% and 7%, respectively, in the first, second and third quarter of fiscal 2019. Solid growth across footwear and apparel, driven by innovative platforms, and robust owned and partnered Digital growth bolstered the segment’s performance. Moreover, growth across sportswear, Jordan, NIKE Kids and Running categories is likely to boost results.

The company expects the momentum in North America to continue in fiscal 2019 and beyond, driven by strong pipeline of innovative products, brand recognition and creation of digitally-led consumer experiences. It targets mid-single-digit revenue growth in North America in the next five years.

NIKE continues to seek opportunities for increasing global footprint, popularity and market share. Apart from acquiring new brands, the company has been focusing on broadening its territory through growth of e-commerce and NIKE Direct businesses, which are contributing meaningfully to top-line growth. In just two years, the enhancement of its digital platform nearly doubled its revenue contributions from NIKE.com and its apps, crossing the $2-billion contribution mark.

Moreover, the company plans to continue investing in the digital transformation, particularly in mobile apps throughout fiscal 2019 and 2020.

However, higher SG&A expenses from increased demand creation expenses and operating overheads are likely to remain a drag. Further, the unfavorable currency environment due to the global trade and geopolitical dynamics is likely to weigh on the company’s sales.

Expectations for Upcoming Quarter

Despite all positives, adverse impacts of FX headwinds somewhat hurt guidance for fourth-quarter fiscal 2019. Notably, the currency environment has turned unfavorable lately due to global trade and geopolitical dynamics, which led to strengthening of the U.S. dollar. This is likely to weigh on the company’s sales on a reported basis. Driven by FX headwinds of nearly 6 points, it expects reported revenues for the fiscal fourth quarter to be in a low-single digit. This is largely softer compared with reported revenue growth of 13% in the prior-year quarter.

The soft reported revenue guidance also resulted from the dismal performance of the recently launched innovation platforms — React and Air Max 270 — as well as impacts of the World Cup. Further, gross margin growth in the fiscal fourth quarter is likely to be partly offset by higher input costs — including cotton, chemicals and labor; FX sourcing headwinds; and the shift in supply-chain investments from the fiscal third quarter to the fourth quarter.

SG&A expenses are expected to increase in the high-single-digit range, driven by investments. Other expenses, net of interest expenses, are anticipated to remain flat.

The Zacks Consensus Estimate for fiscal fourth-quarter revenues is pegged at $10.2 billion, reflecting an increase of 3.8% from the year-ago quarter. Moreover, revenue estimates for North America are pegged at $4,139 million, suggesting 6.8% increase from the year-ago quarter.

What the Zacks Model Unveils

Our proven model does not conclusively 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 currently has an Earnings ESP of +0.75% and a Zacks Rank #4 (Sell). While a positive ESP raises optimism, a negative Rank makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

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

Constellation Brands Inc. STZ has an Earnings ESP of +4.42% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Helen of Troy Limited HELE has an Earnings ESP of +0.60% and a Zacks Rank #2.

Snap-On Incorporated SNA currently has an Earnings ESP of +0.58% and a Zacks Rank #3.

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