Nike (NYSE: NKE)
stock reached all-time highs on Thursday last week as the sports apparel company ran up into their Q2 earnings report which was released after the bell. Their EPS number came in a full $0.12 (20%) ahead of analyst expectations while revenue was also higher than expected and up over 10% compared to the same time last year. When broken down, the revenue number grew an understandably mature 5% in the US domestic market, 10% in EMEA and an impressive 20% in China. Nike has now recorded double-digit revenue growth in China for over 20 quarters in a row.
After a 25% run in the stock since August, where it notched several all-time highs along the way, investors were clearly expecting solid results and by and large, they got them. Beating analyst expectations has been a consistent theme with their quarterly reports going back to at least 2017 with only a few minor hiccups along the way. This kind of performance has fuelled a 100% rally in shares over the past 2 years.
Margins Miss Expectations
However, despite Thursday’s report seeming to give Wall Street more of the same, the stock was hit by sellers immediately upon Friday’s open. Shares fell over 2% in the opening minutes before retracing about half that by the end of the day. It seems like a tiny miss on the company’s gross margin number was the culprit. Considering the company reported gross margins of 44% against a consensus of 44.1%, it shows that when you make a habit of crushing expectations, even a slight miss can do some damage.
That said, shares were trading pretty flat on Monday in light volume and it’s unlikely that Wall Street will consider there to be any structural damage done to the fundamentals. As Goldman Sachs noted earlier this month when they upgraded the stock, “Nike is a unique asset, where a strong brand combined with a disruptive and innovative strategy are positioning the business for multi-year growth, expansion in margins, and higher returns on invested capital."
Wall Street will be watching closely in the coming weeks as the company’s new CEO, John Donahoe, takes the reins. Donahoe brings a good pedigree with him having cut his teeth as a consultant with Bain & Co. before becoming president of eBay Marketplaces (NASDAQ: EBAY) and chairman of PayPal (NASDAQ: PYPL). He’ll be inheriting a company that was Barclay’s overall retail pick when they initiated fresh coverage on the sector in November. Shares have outperformed Under Armor (NYSE: UA) by more than double in 2019 and their recent break-up with Amazon (NASDAQ: AMZN) appears to have had no effect on the company’s prospects.
Technically, shares look rock solid and any further selling on the back of Thursday’s report and the tiny miss on gross margins will likely be viewed as a buying opportunity by investors. RSI is hovering around 70 which is by no means too hot for a stock that’s on the verge of blue-sky territory and all other indicators like the moving averages and MACD remain bullish.
The stock has marched higher within a sturdy range and has good support behind it around the $88 level. This is where the bulls were turned back from multiple times earlier this year but also where they wrestled back control from the bears in November.
Any potential darkening clouds for these bears to latch onto will come in the form of the stock looking a little stretched out at the top of its range and the uncertainty that could come with a new CEO in January. Additionally, were the NBA - China controversy to ramp up to another level, Nike would likely be on the frontline of any damage filtering down to US companies.
All that being said though, the company has navigated plenty of potential pitfalls in recent years and is still the standout sports apparel name with internal momentum continuing to build. As traders shut down their computers for Christmas week, getting long the stock will surely be at the top of many wish lists for 2020.