The American sports giant (NYSE: NKE) will report its earnings tomorrow, September 25 after the closing bell. For more than three years the company has demonstrated positive earnings surprises. More than that, sales have exceeded the expectations for five quarters in a row. Consumer Direct Offensive, a codename for the company’s profit maximization initiative, is believed to be the prime driver of Nike’s recent growth. The program focuses on innovation and direct-to-customer approach. Yet, there are several issues the sports goods manufacturer will have to deal with in order to sustain its long-term profitability and growth. Here is what to know before trading the company in the coming days.
Nike is the global leader in the spheres of athletic footwear, apparel, equipment and sports-related accessories. The company operates in over 160 countries. It can also boast an outstanding history of positive earnings surprises. For 20 quarters already, Nike has been beating the experts’ expectations. The company has also outperformed the industry in 2018, demonstrating 32.5% growth instead of 26.4%.
North American Unit, once stagnating, is back to growth. In Q4 fiscal 2018, this business segment grew 3%. Nike Digital, in its turn, has expanded whopping 30%. The momentum, currently witnessed on the North American market, is believed to sustain itself through fiscal 2019 and even beyond. Although, the latter will require a lot of planning and innovation from the company, mid-single digits growth sounds more than plausible.
Profit maximization initiatives yield tangible results. Triple Double and Consumer Direct Offense strategies, employed by Nike, help the company increase its presence in the segments of athletic footwear and apparel. What’s the secret behind both? Put simply, the company makes its products readily available where the customers need them and when the customers need them. According to its triple-double strategy, Nike is making a commitment to 2x innovation, 2x direct and 2x speed. While 2x looks obvious, it may seem necessary to explain the other two. By being 2x more direct, Nike wants to be closer to its customer, making the order process easier and more versatile. 2x speed is aimed at providing the products faster and making them more personalized, meeting the expectations of each particular client.
This American company is not only good when it comes to innovation, marketing and manufacturing, Nike also knows how to make money. Shareholder value seems to be a priority for its top management, which is always good for the stock price.
Despite all the good things experts have to say about NKE stocks, there are several issues you want to be aware of before trading this particular company. Selling, general and administrative expenses are growing and can easily get out of hand without additional supervision. Higher SG&A hurt overall profitability of the company. Said expenses have demonstrated a 17% increase. At the same time, operating overheads grew 14%. The company better address this before it is too late, and expenses spiral out of control.
Sporting goods manufacturers are numerous, and the competition between them is fierce. A decreasing market share is a risk the company has to keep in mind. Innovation is used as a primary weapon against the competitors. Adidas and Under Armour are always there to claim customers, lost by Nike.
Any businesses, working on a global scale, is subject to risks, associated with exchange rate fluctuations. Taking into account that Nike pays for supplies and sells its products in different currencies, the strengthening USD can translate into lower profitability.
Overall the outlook for the company for the coming days is neutral to positive, with a chance of its stock price going up in case of a favorable earnings report. However, it is also worth mentioning that no company is immune to short-term stock price retracements even after a “inspiring” earnings report is delivered. After all, there is always room for the unexpected.
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