Grab Nike Stock before Q2 Earnings


Dec. 17 2019, Published 7:46 a.m. ET

Nike (NKE) will announce its earnings for the second quarter of fiscal 2020 after the markets close on Thursday. We expect the company to post another strong quarter and maintain the sales growth momentum. Nike will likely maintain double-digit EPS growth despite tough YoY (year-over-year) comparisons and planned investments.

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Will Nike sustain its earnings growth?

We expect Nike to post broad-based growth across all of the geographies. Meanwhile, the margins could see modest gains due to NIKE Direct and increased full-price sales. Steady sales growth and margin expansion will likely support the company’s second-quarter earnings. Share buybacks should cushion the bottom line.

Analysts expect Nike to post revenues of $10.08 billion in the second quarter, which implies YoY growth of 7.6%. Meanwhile, analysts expect the company to post an adjusted EPS of $0.58—up 11.5% YoY.

In comparison, Lululemon (LULU) continued to post stellar sales and earnings growth. During the last quarter, the company comfortably beat analysts’ expectations. On average, Lululemon’s revenues increased by 20% in the previous seven consecutive quarters. The company’s EPS continues to grow at a stellar pace.

Meanwhile, Under Armour (UAA) also posted better-than-expected results during the last reported quarter. However, news about an accounting probe overshadowed the company’s robust quarterly performance.

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Management’s expectation for Q2 earnings

Notably, Nike’s management expects the second-quarter sales growth rate to be in line with the first quarter. During the first quarter, the company’s top line grew 7.2% YoY. Stellar growth in sportswear (including both footwear and apparel) could continue to drive the company’s revenues.

Meanwhile, management expects the gross margins to expand by 25 basis points in the second quarter. Nike’s management expects a shift in the timing of supply chain and other investments to remain a drag on the margins. Lower-than-expected markdowns in NIKE Factory stores could pressure the gross margins.

However, growth in the higher-margin NIKE Direct business will likely outpace the increase in its wholesale business, which should support the margins and earnings.

Nike’s growth drivers

Multiple catalysts could continue to boost Nike’s financials and stock price. The company’s expansion in higher-margin regions and its direct-to-consumer business outgrowing the wholesale business could support earnings growth.

Consistent demand for sportswear and growth in the Jordan brand will likely support the company’s top line. We think that Nike’s digital transformation and a strong lineup of innovative and stylish sportswear could continue to drive sales.

Notably, innovative new products continue to drive Nike’s incremental sales. The first quarter benefited from Joyride’s launch. Sustained demand for products launched in the last few years also drove the company’s top line.

NIKE Digital continues to grow at a breakneck pace due to enhanced digital services and app expansion globally. The NIKE app is already in 21 countries. China will go live during the holiday season.

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China to fuel Nike’s sales and earnings growth

Nike’s revenues in China have grown at a double-digit rate in every quarter in the last five years or for 21 consecutive quarters. In the previous quarter, Nike’s revenues in Greater China rose 27% YoY on a currency-neutral basis.

Nike’s strong performance in China benefits from NIKE Digital, which is growing at a stellar pace. During the last reported quarter, NIKE Digital increased by 70% in China. The strategic partnership with Tmall and WeChat and the launch of the NIKE app will likely drive Nike’s revenues in Greater China in the second quarter.

Analysts remain upbeat

Multiple analysts raised their target price on Nike stock before the second-quarter earnings. Earlier this month, Goldman Sachs upgraded the stock to “buy” and increased the target price to $112 from $95. Previously, Bank of America Merrill Lynch upgraded the stock from “underperform” to “neutral.” Bank of America Merrill Lynch raised the target price to $98 from $70.

Today, Needham raised its target price on Nike stock to $105 from $98. Meanwhile, J.P. Morgan increased the target price to $109 from $105.

On December 11, Wedbush raised its target price to $110 from $100. UBS increased the target price to $97 from $95.

Analysts have a consensus target price of $104.43, which reflects an upside potential of 5.4% based on its closing price of $98.81 on Monday.

Last quarter’s performance

Nike started fiscal 2020 on a strong note and beat analysts’ estimates in the first quarter. The company posted revenues of $10.66 billion, which beat analysts’ estimates of $10.44 billion. The company’s sales improved by 7.2% YoY.

All of Nike’s geographies experienced strong sales led by digital. The gross margins grew by 150 basis points. Meanwhile, the EPS rose 28% YoY and beat analysts’ estimates. Higher sales, margin expansion, and share repurchases drove the stellar EPS growth. Also, lower effective taxes boosted the company’s bottom-line growth.

Nike shares have risen 33.3% on a year-to-date basis. Meanwhile, the S&P 500 has risen by 26.4%. In comparison, Lululemon and Under Armour shares have risen by 85.3% and 15.6%, respectively.


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