Earnings Preview: Nike Inc.

Global leader in sports equipment and apparel maker, Nike Inc. (NKE - Analyst Report) is expected to report its third quarter 2012 earnings after the market closes on Thursday, March 22, 2012. The Zacks Consensus Estimate for the third quarter is $1.16 per share. This represents a year-over-year growth of 7.4%.

We note that the company has been consistently surpassing the Zacks Consensus Estimate for the past three quarters, while it slightly missed in the results of the year-ago quarter. However, the average earnings surprise for the trailing four quarters, which comes to 4.7%, remains unaffected by last year’s miss.

Second Quarter Synopsis

Nike Inc. posted earnings of $1.00 per share in second quarter 2012, beating the Zacks Consensus Estimate of 97 cents and rising 6.4% from the year-ago earnings of 94 cents. Management hinted that a strong top-line performance coupled with selling and administrative expense leverage as well as lower average share count gave a boost to the bottom line.

Nike's total revenue grew 18% to $5,731 million from $4,842 million in the prior-year quarter, primarily driven by a growth in all key categories of the NIKE Brand, except Action Sports, and in geographic regions excluding Japan. The company continued to benefit from its strategy of consistently focusing on innovative products that provide a competitive edge over its rivals. Revenue for the quarter surpassed the Zacks Consensus Estimate of $5,627 million.

Agreement – Estimate Revisions

For the upcoming quarter, 2 out of 16 analysts made upward estimate revision in the last 7 and 30 days, while none of them moved estimates down for both periods. Only 1 out 15 analysts moved up its estimate for the fourth quarter of 2012, while none of the analysts pulled down their estimates in the last 7 days. Over the past month, 2 analysts moved up their estimates for the fourth quarter while 1 analyst moved down the same.

Estimates for fiscal 2012 saw a similar revision trend, as for the fourth quarter, with 2 out of 18 analysts moving up their estimates in the last 7 days, with no negative movements. Again estimates in the last 30 days were revised in the same fashion with 3 upward movements, offset by one downward movement.

For fiscal 2013, 3 out of 18 analysts made positive revisions in the last 7 days, while 5 analysts moved up the estimates in the last 30 days. None of the analysts revised estimates downward in the last 7 days. On the negative side, 1 analyst pulled down estimates in the last 30 days.

Magnitude – Consensus Estimate Trend

The estimate revisions in the last 7 and 30 days clearly reflect a neutral trend in the Zacks Consensus Estimate for the upcoming quarter and the fourth quarter of 2012. However, the revisions point to an upside in the Zacks numbers for fiscal 2012 and 2013.

Following the estimate changes, the Zacks Consensus Estimate for the third quarter of 2012 remained stable at $1.16 per share in both 7 and 30-day periods. In the last 30 days, the positive revisions in fourth quarter estimates neutralized the negative revisions, keeping the Zacks Consensus Estimate unchanged at $1.41 per share. With only one positive revision in estimates the Zacks Consensus Estimate remained stable in the last 7 days.

For fiscal 2012, positive estimate revisions more than offset the negative movements in the 30-day periods, reflecting a positive bias on part of the analysts which resulted in the Zacks Consensus Estimate moving up by a penny to $4.95 per share.

Despite only positive estimate revisions in the last 7 days the fiscal 2012 estimates remained intact. A similar trend was noticed in the Zacks Consensus Estimate for fiscal 2013, which moved up by 3 cents to $5.86 per share in the last 7 and 30 days.

Conclusion

In an attempt to expand its global reach and market share, Nike is aggressively expanding its operations in the emerging markets while focusing on direct-to-consumer business and other brands, which augur well for future operating performance. Moreover, the company’s near-to-debt free balance sheet offers financial flexibility to drive future growth.

However, sluggish discretionary spending and intense competition amid rapidly changing customer preferences will continue to weigh upon the company’s future operating performance. Nike faces intense competition in both domestic and international markets from local as well as established players, such as Adidas AG (including Reebok), PVH Corporation (PVH - Snapshot Report) and Brown Shoe Company Inc. (BWS - Snapshot Report).

Currently, Nike maintains a Zacks #2 Rank, which translates into a short-term Buy rating. Moreover, we retain a long-term Neutral recommendation on the stock.