What To Expect From Nike's Initial Guidance

UBS reiterated its Buy rating Nike Inc NKE, which reports its third quarter results on March 21. Analyst Michael Binetti expects Nike to report EPS of $0.51, global revenues up 5 percent and futures growth of 2 percent. he projects NA revenues to increase 1.7 percent, but sees a 4 percent drop in NA futures.

“While “Closeouts” could remain a 30bp drag (suspended MAP to clear inventory), we believe lower clearance at outlets should allow the DTC impact to GMs to improve from flat YOY in F2Q to the LT 30-40bp lift,” Binetti wrote in a note.

Looking ahead, the analyst expects Nike to reiterate FY2017 revenue outlook at low end of +HSD/LDD.

Importantly, the analyst believes initial FY2018 guidance will also point to the low end of the LT algorithm for +HSD/LDD revenue growth, driven by potential uptick in unit growth at factories, premium pricing and big DTC push.

Further, Binetti sees gross margins should expand by the first quarter, given lower markdowns, less FX pressure, and lapping of FY2017 gross margin accounting rebase.

Though Nike's $50 billion FY20 sales target may be off the table, the analyst wonders if the implied $7.8-$8.3 billion EBIT is still achievable.

“While Consensus now expects FY20 results below LT targets, if the positive biz mix means FY20 EBIT targets are still in play, Street FY20 EPS ests may need to rise by 7-18% in the medium-term,” Binetti highlighted.

The analyst also raised his price target to $67 from $61 as he believes Nike’s challenges are temporary and cleaner inventories in the full price channel should help reverse recent gross margin headwinds.

Moreover, Binetti still believes the company can deliver at least the low end of its +HSD/+LDD long-term revenue growth target.

“With rev growth potentially bottoming & a believable +mid-teens EPS algo, we think NKE’s P/E can start to re-expand. Reiterate Buy,” Binetti added.

Related:

7 Stocks To Watch For March 15, 2017

Altria, Snap-on, United Continental And Japan: Fast Money Picks For March 15