Nike at 7-Month High Ahead of Earnings

Things haven't been going so well for the American footwear brand, with analysts predicting the company to post, at best, mixed results for the quarter covering Black Friday.

The Good News

Investors have been quite optimistic about Nike recently as the stock rose to a seven-month high ahead of its earnings release on Friday. Of course, markets, in general, have been buoyant simultaneously. Bullish analysts point to the potential for a beat in earnings thanks to the reactivation of China, which accounts for 15% of the company's revenue, and outstanding results during Black Friday sales.

However, more cautious analysts contextualise the Black Friday results: yes, they were up 31.6% over the prior year, but that accounts for only 1.6% of sales to that point of the year. After the Black Friday and Cyber Monday results became known, the company also increased its dividends this year. Nike is gearing up to report its fiscal second-quarter earnings, with even the more optimistic analysts admitting to expecting a drop in sales and a marginal increase in the bottom line. The consensus among analysts is for Nike's earnings to come in at $0.97, with sales of $13.8B.

Setting up Realistic Expectations

Analysts expect Nike's Revenues to increase 0.8% from last year's period, which is not particularly auspicious. It's more concerning when considering that the company reported last quarter that its advertising spend had increased 13%, implying that it faces dwindling demand issues. However, it reduced inventory by 10% in its first fiscal quarter.

The company also used up $3.1B of its cash over the last year to pay its owners primarily. If it wants to maintain its current dividend, it must step up cash generation, which means improving sales and margins. That would likely be the focus for investors pouring through the second fiscal quarter release: How are demand dynamics holding up? The company spent substantially already to boost sales, so investors will be keen to see if that is starting to have an effect, particularly ahead of the key Christmas spending season.

Nike Needs Breakout Higher

Nike's share price has risen since the bounce received at $90. With a failure to reach the swing of $82, another weak attempt at $131 would improve the chances of a triangle pattern. And this could end up with a higher breakout or a breakdown. The former case would open the door to $140 and the gap of $157, whereas triangular or a breakdown in the longer-term would first expose $110, double digits, and only then the swing supports seen lower. Of course, a triangle may simply not prevail, which would, in return, shift chances to a bullish longer-term or bearish medium-term flag.

Source: SpreadEx / Nike

Key Takeaways

While Nike's stock has risen to a seven-month high ahead of its earnings release, analysts have mixed expectations. Some point to China's recovery and strong Black Friday sales as positives but caution that Black Friday sales only account for a small portion of total revenue. Investors will be watching how demand dynamics are holding up and if Nike's increased spending has an effect. Last year, the company used $3.1 billion of cash to pay owners, so it must improve sales and margins to maintain its dividend.