Nike Earnings Preview: What Might Be Expected For Fiscal Q4?

Nike Inc NKE closes out fiscal 2017 and reports fourth-quarter earnings after market close on Thursday, June 29.  Nike is expected to report earnings of $0.49 per share on revenue of $8.6 billion, according to third-party analyst consensus estimates. Comparing that to the same period a year ago, revenue is forecasted to grow 4.5% while earnings remain flat.

Just a couple weeks ago, Nike introduced a new company alignment called the Consumer Direct Offense, which it hopes will allow them to “better serve the consumer personally, at scale”. As part of the restructuring, Nike announced it will cut 2% of its global workforce (1,000 jobs), reduce the styles it offers by 25%, and make other changes with the goal of improving innovation, speed to market and its direct connection to consumers. 

Many companies in the consumer discretionary sector have had similar focuses as consumers increasingly shop online, and companies work to figure out an optimal omnichannel strategy. Both Foot Locker, Inc. FL and Dick’s Sporting Goods DKS, two major retailers for athletic brands, reported weaker-than-expected results in the last quarter. And it wasn’t too long ago that The Sports Authority declared bankruptcy, which led many companies to take steps to reduce their reliance on wholesale business.

As companies appear to be working to reduce their exposure to wholesale risks, they also seem to be considering new distribution channels. After holding out for many years, Nike recently announced it would begin selling some of its products on Amazon.com, Inc. AMZN. Few details have been released about the company’s plans to sell on the e-commerce site.   

Another challenge companies face as consumers change the way they shop is being able to form relationships with them. One of the ways athletic apparel and footwear companies have done that is through big endorsement deals with famous athletes, especially in the NBA when it comes to shoes. Nike has deals with Lebron James and Michael Jordan, and Under Armour has product lines endorsed by Steph Curry.   

Trading and Options Activity

In the first quarter, Nike’s stock rallied and was up almost 15% prior to the company reporting fiscal Q3 results. After reporting mixed results where revenue came in shy of estimates, the stock dropped about 7%.  It subsequently declined to a yearly low of $50.79 on June 16. Since then, it has recovered slightly and is up 2.65% year to date, versus the S&P 500’s (SPX) 8.1% return.

The options market has priced in an expected share price move of 5.5% in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Looking at trading activity at the June 30 weekly expiration, calls have been active at the 55 strike price while puts have been active at the 52 strike. The implied volatility sits at the 62nd percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

FIGURE 1: NIKE YTD PERFORMANCE. After rallying at the start of the year, Nike’s stock has declined since last quarter’s results and has given up most of those gains. The stock is up 2.65% year-to-date as of June 29. Nike is charted above compared to Under Armour Inc UA on the purple line. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Looking Ahead

The Consumer Confidence Index climbed in June to 118.9, up from 117.9 in May. Overall, consumers remain upbeat on the economy, and wage growth has been holding steady. That’s generally a positive combination for companies in the consumer discretionary sector, but not all are benefitted equally. As earnings come out this quarter, we’ll see if consumer optimism is translating into increased sales.