Nike Earnings Preview

Nike’s premier pricing power could be key to offsetting the cost of covid in China and exit from Russia. Can guidance ahead of another challenging summer compensate for rising costs?

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Getting a handle on inventory

Last summer, Nike was forced to shut down its factories in Vietnam due to the covid outbreak, which accounts for around 80% of its production ahead of the key holiday sales period. Since then, the firm has been struggling with getting enough inventory to meet demand. This has led to increased costs, but investors are going to be keen to see if they've been passed on to the consumer.

Nike's margins are likely to be in focus during the report later today, as well as more details on what the real impact of the exit from Russia will be. Operations had been suspended since the start of March, but an official exit from the market was only just recently announced. Although Russia accounts for just 1% of the company's sales, it might be a factor of note should Nike adjust its outlook for the fiscal year.

Where the problem lies

China is Nike's second-largest market, and the rolling lockdowns are expected to have an impact. This was one of the reasons cited by Deutsche Bank when the analyst cut the price target and said it expected Nike to report earnings below estimates this quarter.

Nike beat three out of the last four quarters and is currently expected to report slightly lower EPS at $0.81 (compared to $0.87 in the prior quarter). Despite headwinds, Sales are expected to have expanded substantially in the fourth fiscal quarter, but still be lower compared to the prior year's quarter at $12.1B. That would be a substantial improvement over the $10.6B of the prior quarter, and only just fractionally lower than the $12.3B beat reported last year.

Nike bounces off golden pocket

After bouncing off at the 61.8% Fibonacci retracement of the $60-$175 leg near $105, Nike’s share price is trading around $113 at the time of writing. There, prices merge with the $105.6 high of January 2020, forming strong support.

If that support is lost, price action would become particularly bearish. Below there, $100 is major support, then $90.

Bullish RSI divergence suggests the support is more likely to hold. If that’s the case then the swing high of $123.8 is the next resistance. It has formed a cluster with the swing low of March-June ‘21. Above there, lies the 200-day average and previous swing high near $143.

Source: Spreadex trading platform

Key takeaways

Nike was forced to close down factories in Vietnam due to the covid outbreak and may need to pass on the increased costs to its consumers, which it should be in a position to do because of its premium brand appeal. The company recently announced it will stop selling in Russia which may force it to adjust its outlook for the fiscal year.

Deutsche Bank has lowered Nike’s Q4 earnings expectations due to the recent lockdown in Chiba but if Sales meet or beat estimates the impact of the lockdowns would be minimal.