Factors Likely to Influence NIKE's (NKE) Earnings in Q2

NIKE Inc. NKE is slated to release second-quarter fiscal 2019 results on Dec 20. 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 8.1%. Moreover, it maintained a spectacular earnings record for more than three years, delivering positive earnings surprises for 25 straight quarters. In the trailing four quarters, the company recorded average positive earnings surprise of 16.2%. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The Zacks Consensus Estimate for the quarter under review is 45 cents, reflecting a year-over-year increase of 2.2%. We note that the Zacks Consensus Estimate for the fiscal second quarter remained unchanged in the last 30 days.

NIKE, Inc. Price and EPS Surprise

NIKE, Inc. Price and EPS Surprise | NIKE, Inc. Quote

Moreover, NIKE outperformed the industry in the past month, indicating a positive sentiment ahead of the earnings release. Though the company’s shares decreased 1.1%, it outperformed the industry’s 2.8% decline. Additionally, its shares have witnessed growth of 15.1% in the past year.

Factors at Play

Gains from NIKE’s robust growth and innovation efforts, alongside its strategy of acquiring sponsorships for various sporting events across the globe, are well reflected in its robust sales and earnings surprise trend. The company’s performance graph is influenced by strength in international business and the global NIKE Direct business. Strong progress on Consumer Direct Offense through innovation and focus on direct-to-customer are key drivers. Moreover, momentum in the North America business built investors’ confidence on the stock.

NIKE’s North America business returned to healthy, sustainable growth in fourth-quarter fiscal 2018, with momentum continuing in first-quarter fiscal 2018. This was fueled by new innovative platforms, and strong owned and partnered Digital growth. The company expects solid performance in North America through fiscal 2019 and beyond. It continues to target mid-single-digit revenue growth in North America in the next five years.

Driven by these positives and stronger-than-expected start to fiscal 2019, NIKE continues to expect revenue growth in a high-single digit in fiscal 2019. However, operating gains are likely to be offset by FX headwinds due to stronger dollar.

For second-quarter fiscal 2019, the company expects currency-neutral revenue growth of 9%, in line with the fiscal first quarter. However, taking into account the FX scenario, it expects reported revenues of 2-3 points lower than the anticipated currency-neutral revenue growth in the fiscal second quarter.

Clearly, the company’s outlook for the upcoming quarter, as well as the fiscal year, bears significant impacts from FX headwinds as the currency environment has turned unfavorable lately. This is mainly due to the global trade and geopolitical dynamics, which has led to the strengthening of the U.S. dollar.

The Zacks Consensus Estimate for fiscal second-quarter revenues is $9.2 billion, reflecting an increase of 7.1% from the year-ago quarter. Moreover, revenue estimates for North America are $3,688 million, reflecting 5.8% increase from the year-ago quarter.

Further, the company expects gross margin expansion of 50 bps or slightly higher in fiscal 2019. Gross margin for the fiscal second quarter is expected to be on par with the expansion of 50 bps witnessed in the fiscal first quarter. However, the company continues to anticipate lesser gross margin expansion in the first half of fiscal 2019 compared with the second half.

Despite expectations of margin gains, we note that the company’s higher SG&A expenses continue to be a headwind. SG&A expenses have been increasing on account of higher operating overheads and demand creation expenses. For fiscal 2019, the company expects SG&A expenses to increase in a high-single digit. Moreover, SG&A expenses for the fiscal second quarter is expected to increase in about low-teens, driven by the timing of investments in sports marketing and investments in new digital capabilities.

While higher S&A expenses are likely to pose concerns in the short term, the above-mentioned strategies clearly profess that NIKE has significant growth potential in the days ahead.

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 a Zacks Rank #3 and an Earnings ESP of -1.11%. While the company’s favorable Zacks Rank increases the predictive power of Earnings ESP, a negative Earnings ESP 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:

Boot Barn Holdings, Inc. BOOT has an Earnings ESP of +6.85% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Darden Restaurants, Inc. DRI has an Earnings ESP of +4.40% and a Zacks Rank #2.

Constellation Brands Inc. STZ currently has an Earnings ESP of +0.43% and a Zacks Rank #3.

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