Earnings Preview: Nike and Finish Line

Nike Kyrie 1 Driveway
The Nike Kyrie 1 Driveway.
Courtesy of Nike

This week, Nike Inc. will have yet another opportunity to prove its profit-making prowess while Finish Line Inc. will get a chance to potentially repeat its recent earnings win.

Here’s what you need to know ahead of their earnings releases.

Nike Inc.

Beaverton, Ore.-based Nike posted an all-around Wall Street beat in its fourth-quarter, reported on June 25. Nike continued to showcase its ability to absorb FX hits and still dominate the athletic-footwear space.

A 24 percent rise in net income to $865 million, or 98 cents per share, and a 5 percent — or 13 percent currency-neutral — gain in net revenues to 7.8 billion, were among its Q4 highlights.

Ahead of its Q1 earnings release, analysts remain bullish on the firm. UBS Investment analyst Michael Binetti raised his EPS price target — from $1.18 to $1.20 — for the athletic-footwear-and-apparel powerhouse on Sept. 21.

“We’re raising our price target and reiterating our buy rating based largely on positive read-throughs, our view that global futures will accelerate sequentially in F1Q15 and our view that improving futures-versus-inventory dynamics should unlock [gross margin] upside and EPS upside potential in the [near-term],” Binetti wrote.

A recurring topic among market watchers has been Nike’s exposure in China, which has been undergoing significant economic instability in recent months.

“While we are mindful of Nike’s exposure to China and concerns around an economic slowdown in the region, we believe inventory levels are healthy and demand for the brand is stronger than ever following a successful marketplace reset,” wrote Nomura Securities International Inc. analyst Robert Drbul, in a Sept. 21 note. “In addition to being well-positioned competitively, Nike is also one of the most important consumer brands in China with over $3 billion in sales in FY15.”

Citi Research analyst Kate McShane and Susquehanna Financial LLLP analyst Christopher Svezia were also upbeat about Nike’s performance in the world’s most populous country, despite its stock market woes.

McShane said her research shows that Nike’s Q1 sales, in China, accelerated by high single digits year-on-year from mid single digits in Q4, with footwear up 8 percent.

Svezia, however, expressed concerns about Europe and the Emerging Markets, noting that he expects negative currency and strong World Cup compares to drag down sales in the region.

Nike reports Q1 on Sept. 24.

Finish Line Inc.

Finish Line closed out a better-than-expected Q2 with 29 percent growth in profits, to $13.7 million, and a 9 percent rise in net revenue, to $443 million, the company said on June 26.

In addition to blowing through Wall Street’s estimates for revenues and earnings per share, the Indianapolis-based athletic footwear and apparel retailer also posted a 5.5 percent jump in comparable-store sales.

Svezia said he expects more year-over-year comp improvement from the firm when it releases its earnings on Sept. 25.

“We look for 4 percent comp against 1.5 percent last year, driven by strength in both running and basketball footwear,” Svezia wrote on Sept. 21. “Running should continue benefiting from assortment changes away from performance and into trend-right fashion styles … Strength in basketball should be driven by increased pricing, better launches and an easy comparison (flat last year) given assortment changes following a series of wrong buys at Brand Jordan last year.”

Sam Poser, Sterne Agee CRT analyst, said he expects the firm’s gross margin to decline 60 basis points due to increased promotional activity.
“We are lowering our 2Q16 EPS from 58 cents to 55 cents versus consensus of 57 cents, as we are assuming higher [selling, general and administrative expenses] spending in 2Q,” Poser wrote on Sept. 16. “We are maintaining our [same-store-sales] of 0.8 percent, below consensus estimate of 3.4 percent. Our [comp] estimate is largely based on the later Labor Day this year.”

Analysts say they will also be closely watching the performance of the Macy’s Finish Line shop-in-shops.

“Macy’s should continue being solid,” Svezia wrote. “We believe the Macy’s partnership will remain on track toward reaching $240-$250 million sales this year with improving margins.”

Meanwhile, a less upbeat Poser said that although the Macy’s initiative “is working well for now,” he remains sidelined.

“[I’m] unsure if there’s a real incremental sales and margin story beyond FY16,” Poser wrote.