Nike: Earnings Preview

The global leader of sports equipment and apparel maker, Nike Inc. (NKE) is expected to report its third quarter 2011 earnings on Thursday, March 17, 2011. The Zacks Consensus Estimate for the third quarter is $1.11 per share.

Second quarter Recap

Nike posted strong fiscal 2011 second-quarter earnings of 94 cents per share, reflecting a growth of 24% from the year-ago earnings of 76 cents per share. Earnings for the quarter also surpassed the Zacks Consensus Estimate of 88 cents. Healthy top-line growth, higher gross margins and effective inventory management were the key highlights of the quarter.

Nike’s total revenue grew 10% to $4,842 million from $4,405 million in the prior-year quarter. The company continued to benefit from its strategy of consistently focusing on innovative products that provide an edge over its rivals. Revenue for the quarter outpaced the Zacks Consensus Estimate of $4,806 million.

Nike’s quarterly gross profit grew 12% year over year to $2,193 million, while gross margin expanded 80 basis points to 45.3%.

Agreement of Analysts

In the last 30 days, out of the 14 analysts covering the stock, only 1 analyst has raised the estimate for the third quarter of fiscal 2011, while none of the analysts slashed their estimates for the same quarter. The last 7 days follow the same trend.

The company’s strong product line-up and its flexibility to operate in a changing environment ensure analyst confidence for the quarter’s performance.

Magnitude of Estimate Revisions

With hardly any earnings revision by the analysts in the last 30 days, the Zacks Consensus Estimate for the third quarter of 2011 remains unchanged at $1.11 per share.

Surprise History

With respect to earnings surprise, Nike has met as well as topped the Zacks Consensus Estimate in the last 4 quarters, ranging between 0.0% and 13.5%, with the four-quarter average being 13.2%.

Our Recommendation

Taking into account Nike’s dominance in the athletic industry, we believe that the company has the ability to drive growth consistently. The company’s long-term strategy of aggressively expanding operations in the emerging markets and focus on direct-to-consumer business and other brands add to our positive sentiment.

The unique amalgamation of solid balance sheet strength, free cash flow generation capability and an efficient managerial team will enhance Nike’s top-line performance in the coming quarter.

Nike’s exposure to international markets however makes the firm susceptible to currency fluctuations. The strong U.S. dollar may adversely affect the top- and bottom-line results. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside of the U.S. An increase in product price may have a direct impact on consumer demand.

Nike’s business remains highly competitive in both domestic and international markets running up against local as well as established players like Deckers Outdoor Corp. (DECK), Adidas AG (including Reebok) and Puma.

We maintain our long-term “Neutral” recommendation on Nike. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates upward directional pressure on the stock over the near term.

NIKE INC-B (NKE): Free Stock Analysis Report

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