New Nike Trade Idea as Surprise Rally Follows $1 Billion Tariff Projection
Traders might be looking to chase some momentum in the athletic brand.
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On Thursday evening, Athletic footwear, equipment and apparel provider Nike NKE released the firm's fiscal fourth quarter financial results.
For the three-month period ended May 31, the firm posted a GAAP EPS of $0.14 on revenue of $11.097 billion. While these top- and bottom-line numbers both beat Wall Street's expectations, that sales print was only good enough for a year-over-year sales contraction of 12%. That was a further deceleration in performance from the 9% contraction for the third quarter and 8% contraction for fiscal Q2. As for the earning number, $0.24 compares very poorly to $0.99 for the year-ago period, adjustable up to $1.01.
Despite the apparently declining business, the stock is trading up sharply on Friday morning. The firm painted a rosier picture going forward. The firm has some confidence in its own "Win Now" program and feels that the most negative impacts felt from the implementation of said program is past them. That program focuses the firm's efforts on culture, product, marketing, marketplace and a ground game that itself prioritizes five key sports, three key countries and five key cities. Still, the firm expects tariffs as well as the firm's insistence upon offshore suppliers and production to cost Nike a rough $1 billion and 100 basis points in terms of gross margin.
Nike Operations
For the period reported, as revenue came in 12% to $11.097 billion, the cost of sales dropped 5% to $6.628 billion.
This put gross profit at $4.469 billion (-20.7%), as gross margin dropped from 44.7% to 40.7%. Total operating expenses increased 1% to $4.148 billion as operating expenses (in percentage of revenue generated) expanded form 32.4% a year ago to 37.4%. After accounting for interest, other income and expenses as well as taxes, GAAP net income printed at $211 million, which was down 86% from the year-ago comp of $1.5 billion. This works out to a GAAP EPS of $0.14 per fully diluted share, also down 86% year over year.
Nike Stock Fundamentals
Nike did not release a statement of cash flows with the press release nor with the statement of income or the balance sheet. You know how I love that. I know they will in short order, but when a firm reports an especially poor quarter, which this truly is, investors who are anything more than chart monkeys really want to look at operating and free cash flows. I would prefer to have that information.
Turning to the balance sheet, Nike ended the quarter with a cash position of $9.151 billion (-21%), and inventories of $7.489 billion (down small). This put current assets at $23.362 billion (-8%). Current liabilities add up to $10.566 billion, leaving the firm's current ratio at 2.21, which is quite healthy. However, that ratio is down from a much more robust 3.59 a year ago. To the firm's credit, there is almost no short-term debt on this balance sheet.
Total assets amount to $36.579 billion, which includes just a very small number for goodwill or other intangibles. Total liabilities less equity comes to $23.366 billion, which does include long-term debt of $7.961 billion. The firm could handle this out of pocket if necessary. This is not a bad looking balance sheet on the surface. The only concern is that the pace of the deterioration in the quality of this balance sheet over just 12 months' time is very concerning.
Nike Guidance
For the current quarter, the firm expressed uncertainty during the call. Current quarter revenues are expected to contract by mid-single digits in percentage terms. Gross margin is expected to be down 350 to 420 basis points. Included here is 100 or so basis points due to the tariffs. That still means, even though part of that 100 is due to a failure to navigate the current business environment, we are still talking about quite a few basis points of degradation in corporate execution.
My Thoughts on NKE Stock
Go ahead and chase NKE stock up more than 15% on Friday if you must. I did not see much here to get impressed about.
Readers will see that from early April through mid-June, Nike shares developed a rising-wedge pattern of bearish reversal. Late the week of June 13, the shares broke through the lower trend line of that wedge. The shares at that time, gave up their 21-day EMA, but did find support at its 50-day SMA. The stock was set up for further declines.
Friday morning's pop took back that 21-day line and gapped the stock all the way up to its 200-day SMA. Should the stock take and hold that thin red line, portfolio managers will be forced to increase long-side exposure. That said, a failure at that line, means that this stock, at these prices, is a short idea.
Relative strength has spiked and gone from neutral to slightly overbought. The daily MACD has suddenly taken on a much more bullish posture. The stock is literally trading at its pivot point.
NKE Trade Idea (Minimal Lots)
- Sell 100 shares of NKE at or close to the last sale of $72.10
- Target: 21-day EMA (currently $62.30)
- Pivot: 200-day SMA (currently $71.70)
- Add: Don't
- Panic: 8% Rule, which in this example would be $77.87
At the time of publication, Guilfoyle had no positions in any securities mentioned.
