Tariff Issues In The Foreground With Nike Q4 Earnings

The U.S.-China trade dispute is likely to be in the foreground when Nike Inc. NKE reports its quarterly earnings after the closing bell Thursday.

Some analysts say that NKE, which is up about 15% on the year, has so far defied expectations that trade tensions would dampen its run, but since the issue has shown virtually no signs of progress, it’s still a key issue of concern for many investors.

For NKE, trade issues are a significant concern because, like most major athletic shoe makers, it relies heavily on imports from China. So escalating tariffs translate into escalating costs, which companies either have to absorb or pass on to customers, who may be less willing to spend more. With that said, it’s no surprise that NKE is among the companies that has come out against increasing tariffs on Chinese imports.

Nike is among the shoe manufacturers that signed a letter to policymakers that took a hard stance against tariffs, which it said would be “catastrophic for our consumers, our companies and American economy as a whole.”

Recall that last quarter, NKE’s business in Asia was thriving, so going forward, it is expected by many that the topic of China-related tariffs is likely to be in the foreground of its earnings calls in the near term.

On a side note, it might be worth keeping in mind that as NKE reports, President Trump and Chinese President Xi Jingping are scheduled to meet as the G-20 summit begins on Friday. So any news on the tariff front could change and possibly drive some movement in NKE shares on top of whatever comes out of its earnings report.

NKE’s Q4 Numbers to Watch

For Q4, it might be worth keeping an eye on several figures in NKE’s report, including its North American sales, which were a bit sluggish last quarter, and of course the sales in China, which were booming.

In March, shares slid even as NKE beat expectations with revenue, which was up 7% year over year to $9.6 billion, and net income of $1.1 billion, up from a loss the year prior. Shares likely tumbled because its fiscal Q3 North American sales were up only 7% year over year to $3.81 billion, softer than expected as customers seemed to lose interest its Converse brand, which saw total sales decline 2% year over year.

As for sales in China, they were up 24% last quarter. NKE executives said in a call with analysts that the company is still bullish about long-term growth potential in China despite the current uncertainty around tariffs.

Looking ahead to the Q4 report, the third-party consensus earnings estimate is $0.66 per share, down from $0.69 per share a year ago. Revenue is projected to increase about 3.9% to $10.17 billion from $9.79 billion last year.

Investors seem to be a little less enthusiastic than they were before the Q3 report, with shares losing ground throughout May, but rebounding so far this month (see figure 1 below). Earnings expectations may be lower, but some Wall Street analysts say fears about NKE’s North American revenue growth and China tariffs may be overdone.

Some Wall Street analysts say they remain optimistic on NKE on the grounds that it has proven to be pushing ahead with technological innovation, such as with its SNKRS app and Nike app. It also appears to be well positioned in the market for women’s athletic wear, which has been a thriving retail niche. In that line, NKE has indicated that it’s planning to add its own Yoga collection, which is designed to pit it more directly against competitor Lululemon Athletica Inc LULU.

FIGURE 1: RUNNING HIGH AND LOW. Shares of Nike (NKE) had a nice run higher at the start of 2019, but softer Q3 sales and concerns of tariff fallout seem to have put a damper on shares in recent weeks. Data source: NYSE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Nike Options Activity

For NKE, the options market has priced in an expected share price move of about 4.8% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Though options volume has been light overall, call activity has been a bit higher at the weekly 86 strike. Put activity has concentrated at the weekly 83 and 83.50 strikes. The implied volatility sits at the 54th percentile as of Tuesday.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Image Sourced From Pixabay