Nike Pre-earnings Analysis

Nike Pre-earnings Analysis

Chart done on hourly timeframe. Nike shares are significantly underperforming the market this year, but buyers seem optimistic ahead this report as they buy the shares off its 52 week low range. The pre-earnings run up could be associated with Lululemon’s most recent earnings report, which showed strong demand for athletic wear, but that doesn’t necessarily guarantee Nike will deliver the same strong numbers and forecasts. Comparing the two companies side by side, we see a similar pattern in their revenue trend. Both reflect flat year over year growth and a plateau in their net income. Consumer demand is waning, and rising competition isn’t helping either, making the path for apparel and footwear companies very bumpy. 

However this isn’t just any athletic company, this is Nike, which has survived decades of uncertainty, competition, and poor economic conditions. This is a company that has grown its revenue by nearly 100% in the past five years, and continues to post growth, despite the challenges. Nike has surpassed their earnings expectations in three of the past four quarters, surprising investors by 42% in the last report. 

So what gives? Despite Nike’s ability to continuously deliver, the company’s numbers are still about flat in terms of profitability. The high interest rate environment and challenges in worldwide manufacturing has taken a big chunk from their profit margins, making their price to earnings ratio expensive. Nike is not a technology company, so profit margins are usually low, but they are still very important to investors, especially given Nike’s long history. Small and young companies who struggle to deliver on profitability are usually forgiven because they’re still in a growing phase, but Nike’s bar is set high, making it a tough battle for them. A P/E of 28 is still high, which means that Nike’s profitability will once again be in question this quarter. Chances of them beating the number is high, but a beat alone won’t be enough, they need to report 30-40% above the anticipated .86 per share in order to really move the needle; or they need to least provide rosy guidance to justify the forward P/E. 

Options chain analysis:

NKE option chain expiring on July 19 2024 currently reflects an implied volatility reading of 42%, which translates to about a $8.50 move from the underlying stock between now and then. The direction of that move will depend on their earnings outcome and call.