Overheard On Wall Street: The Buzz On Nike And Finish Line

Nike Hyperfuse
Nike's Hyperfuse sneaker.
Courtesy of Nike.

Wall Street’s footwear chatter this week included Trade Promotion Authority (TPA), conflict in the South China Sea and some earnings talk.

Footwear News has kept you ahead of the curve on the South China Sea dispute, as well as TPA and the Trans-Pacific Partnership (TPP), so it’s time to round up the earnings information that you need to know now.

Next week, Nike Inc. and Finish Line will release their quarterly financial reports. Read on for the scoop straight from the Street’s insiders.

Nike Inc.

As Nike continues to dominate in athletic footwear, it can be quite the task to get market watchers to utter a critical world of the mega-company.

In the leadup to the firm’s June 25 Q4 earnings release, analysts remain generally upbeat about the athletic behemoth but have expressed some concerns regarding its high valuation.

A neutral Christopher Svezia, Susquehanna Financial LLLP analyst, referred to Nike’s valuation as a “roadblock” in his June 19 note, while still highlighting some positives on the firm.

“We view current valuation as fair since shares would need to reach peak multiples on close to peak margins in FY17 for us to get constructive,” Svezia wrote, in raising his Q4 EPS estimate to 82 cents. “While Nike remains a premium global consumer name, we continue to look for a more attractive entry point at this time.”

Similarly, UBS Investment Bank analyst Michael Binetti said he has reasons to feel upbeat about the brand even though its share price is on the higher end.

“While the stock isn’t cheap, we prefer names like Nike, with accelerating global growth and pricing power, amid softlines’ industry deflation,” said Binetti in a June 19 note on his buy-rated stock.

Sterne Agee CRT analyst Sam Poser also raised his estimates for Nike, while noting that its “healthy” valuation and “the law of large numbers and difficult comparisons make the growth rate in North America susceptible to deceleration.”

“We expect Nike to continue its aggressive spending for the foreseeable future and see little upside to current estimates,” wrote Poser on June 19. “Nike will continue to gain share worldwide due to ongoing innovation and expenses dedicated to [research and development], marketing and infrastructure.”

The brand’s takeover of the NBA license from Adidas in 2017, Poser added, should prove to be an incremental benefit for Nike worldwide, particularly in China.

Svezia said he expects that waning FX pressure should help the firm’s numbers in Q4. Poser also raised his Q4 EPS, from 78 cents to 80 cents, due to FX changes.

Finish Line Inc.

When Finish Line reported Q4 on March 30, the Indianapolis-based athletic footwear-and-apparel retailer beat Wall Street’s forecast for earnings per share and revenues. Still, analysts were mixed on the company’s earnings release, some indicating that its FY 2016 guidance suggested product-margin headwinds.

While Poser expects the retailer’s Q1 performance to be in line with market expectations, he sees ongoing challenges for the company.

“Individual brand identities are wanted across Finish Line’s platforms,” Poser wrote in a June 18 note. “The company allows what they carry to define them rather than having each banner define what’s carried within.”

Poser said he expects Finish Line’s Macy’s stores to perform well this year but wonders “what’s next?” Further, Poser described the Running Specialty Group as “a distraction.”

“It appears as if management is not paying enough attention to its struggling core business,” he wrote.

A more positive Svezia said he views full-priced sales as the key to margin recovery for Finish Line.

“We believe sales growth accelerated as the quarter progressed, driven by strength in basketball, running and, to a lesser degree, casual and apparel,” wrote Svezia on June 19.

Canaccord Genuity Inc. analyst Camilo Lyon upgraded Finish Line to a “buy” from “hold” this week on the belief that “the issues that drove the decline in merchandise margins last year are nearing an end, resulting in a faster margin recovery than current estimates or guidance imply.”

“Finish Line should benefit from an improved assortment of running product that more closely matches current casual demand trends as well as an increased allocation of key basketball styles,” Lyon wrote on June 15. “The company’s efforts to improve the profitability of Macy’s, coupled with a tightly managed expense structure, should add to our earnings re-acceleration thesis.”

In a followup report on June 17, Lyon noted that “further evidence of Jordan restocking” bolsters his thesis on the firm.