The world’s largest athletic shoes and apparel maker Nike Inc. (NASDAQ: NKE) reported better than anticipated fiscal 2018 third-quarter results last Thursday evening. Following the results, the stock has gained about 5% to trade at $65 levels. Despite good results, we expect the stock of Nike to decline in the short-term due to reasons presented underneath.
For the quarter ended February 2018, the Beaverton-based company reported revenues of $8.98 billion, up 7% from $8.43 billion last year. The Consensus estimate of Thomson Reuters was $8.85 billion. Net loss for 3Q2018 was $921 million, or 57 cents a share, compared with a net profit of $1.14 billion, or 68 cents a share in 3Q17.
The company recorded an additional income tax expense of $2.0 billion during the recent quarter. This reduced the quarterly earnings by $1.25 per share. Excluding the one-time charges, Nike recorded earnings of 68 cents a share, compared with analysts’ Consensus estimate of 53 cents a share.
Region-wise, EMA (Europe, Middle-east & Africa) sales increased 19% y-o-y to $2.30 billion. Greater China revenues were $1.336 billion, an increase of 24% from last year. Asia, Pacific & Latin America sales were $1.268 billion, up 13% on a y-o-y basis. However, North America posted a 6% y-o-y decline in sales to $3.571 billion.
Nike has been struggling to hold on to its market share in North America and rivals such as Adidas and Under Armour are steadily gaining ground.
The company’s CFO Andy Campion is confident that the US sales would turn positive and grow again by the first half of 2019. The opinion is based on a decline in inventories and an increase in orders from the company’s strategic partners in North America. The company also stated that it would begin testing mobile checkout in two stores before going for a wider rollout. Nike also acquired New-York based Zodiac, which enables retailers to identify the customers who would add value to their businesses.
However, analysts are not sure how far the company would succeed in its plans to regain the lost market share in North America.
The company has also got into several other issues in the recent past. Last week two executives left the company on growing complaints from female employees about its workplace culture. Trevor Edwards, who was once expected to become the next chief executive, resigned amid discontent over his poor conduct. Likewise, Jayme Martin, vice president and general manager of global categories was ousted.
Canaccord’s Camilo Lyon has pointed out that Nike’s Jordan Franchise is still not on a path to recovery. According to Lyon, the company’s bottom line will also be hit due to a higher tax rate of 22%, compared with the pre-tax reform rate of 16%. Lyon also believes that product innovations cannot assist Nike in gaining the lost market share quickly. With these factors in mind, Lyon has given a ‘hold’ rating for the stock, with a price target of $60.
Bill Ackman’s Pershing Square has offloaded its stake in Nike, booking a profit of $100 million. That indicates a bearish view of the stock. Therefore, based on the facts discussed above, we are expecting the stock to move down in the near future.
Technically, the historical price chart indicates a major resistance for the stock at 67. The accumulation/distribution indicator is also descending. Furthermore, the stock is moving downwards with a descending trend line acting as a resistance. Therefore, a further downtrend is expected in the short-term.
We prefer to bet on a decline in the stock of Nike by investing in a put option, which is valid until April 4th. Furthermore, we prefer the stock to trade at about $66 at the time of investing in the put option.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
