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Will Nike Beat Analysts’ Earnings Expectations Yet Again?

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Strong track record

Nike’s (NKE) earnings have exceeded analysts’ expectations for 27 consecutive quarters. The company’s adjusted EPS of $0.68 were flat on a year-over-year basis in the third quarter of fiscal 2019, which ended on February 28. However, the company’s third-quarter adjusted EPS exceeded analysts’ forecast by three cents. The impact of higher revenue, improved gross margin, and lower taxes on the company’s EPS was offset by higher investments associated with its growth initiatives.

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Nike’s gross margin expanded more than 130 basis points to 45.1% in the third quarter. The improvement in the company’s gross margin was driven by higher average gross selling prices, increased full price sales, and a rise in sales of the higher-margin NIKE Direct business, partially offset by higher product costs.

Nike’s operating margin was almost unchanged on a YoY basis at 13.0% in the third quarter of fiscal 2019 as a higher gross margin was offset by a rise in SG&A (selling, general, and administrative) expenses as a percentage of sales.

Rival Lululemon (LULU) reported a 40 basis-point expansion in its operating margin to 16.5% in the first quarter of fiscal 2019, which ended on May 5.

Expectations from fiscal Q4

Analysts expect Nike’s adjusted earnings to decline 4.3% to $0.66 in the fourth quarter of fiscal 2019, which ended on May 31. The decline in the company’s fourth-quarter earnings is expected to be caused by investments in growth initiatives.

Nike expects a 75 basis-point expansion in its fourth-quarter gross margin driven by higher full price sales and steady growth in the sales of the higher-margin NIKE Direct business. However, higher input costs (mainly that of cotton, chemicals, and labor), currency headwinds, and the shift in the timing of supply chain investments from the fiscal third quarter into the fourth quarter are expected to impact Nike’s fourth-quarter gross margin adversely.

Nike’s fourth-quarter operating margin might be under pressure due to higher strategic investments.

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