Categories Earnings, Retail

Nike (NKE) Q3 earnings preview: Margin pressures likely to weigh on results

The Covid-19 outbreak remained a major concern for Nike as the spread isolation could lessen the demand

Nike Inc. (NYSE: NKE) has been struggling in the challenging environment amid the sportswear giant inching closer to its third-quarter 2020 earnings release on Tuesday after the market closes. The results continued to be weighed by the competition and margin pressures despite enjoying solid customer loyalty.

The demand for sportswear continues to remain high but the Covid-19 coronavirus outbreak remained a major concern for Nike as the spread isolation could lessen the demand. Already, the pandemic outbreak has prompted most of the sports events to be rescheduled to a later date.

Nike Air Jordan shoes
Courtesy: Paul Volkmer on Unsplash

Excluding the pandemic impact, the company continues to see opportunities for driving future growth and profitability with the foreign currency markets remaining volatile, in part due to geopolitical dynamics leading to a stronger US dollar. The company remains confident in the long term as it could effectively manage its business by executing operational strategies to achieve its financial goals.

Nike is likely to face a decline in the demand creation expense due to retail brand presentation costs as well as advertising and marketing expenses, which is backed by a timing shift of investments in certain brand campaigns. The company is expected to continue investments in transformational capabilities, particularly in Nike Direct and global operations.

Analysts expect the company’s earnings to fall by 11.80% to $0.60 per share while revenue will increase by 2.4% to $9.84 billion for the third quarter. The company has surprised investors by beating analysts’ expectations thrice in the past four quarters. The majority of the analysts recommended a “hold” rating with an average price target of $100.06.

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For the second quarter, Nike reported a 32% jump in earnings as a strategic and targeted investment in digital transformation and key business segments’ performance drove the top-line higher. Gross margin increased by 20 basis points aided by higher average selling prices and margin expansion in NIKE Direct and Converse, which partially offset higher product-costs due to incremental tariffs.

After falling over 32% in the past three months, the stock looks more attractive. However, the shares are overvalued at current levels with a bearish pattern trend. The performance outlook is negative in the near and long-term. And, the stock is trading below the 50-day moving average of $90.64 and the 200-day moving average of $93.78.

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