Should You Buy Nike (NKE) Ahead Of Earnings?

Shares of Nike (NYSE:NKE) dipped marginally on Wednesday ahead of the company’s upcoming Q3 earnings report. The sportswear giant’s stock is still up 6.8% since the start of the year, but recent executive-level turmoil could spell trouble.

Nike Brand President Trevor Edwards and VP Jayme Martin both resigned last week amid a code of conduct-related scandal. At this point, there are few details about what specifically happened, but investors should note that CEO Mark Park is now committed to staying in his role beyond 2020 .

Aside from the possibility of a scandal and some reorganization at the executive level, Nike also faces real business challenges. Nike posted earnings of $0.46 per share last quarter, which topped our expectations by nearly 18% but marked an 8% downturn from the year-ago period. The sportswear company attributed this drop to a decline in gross margin as well as higher selling and administrative expenses.

Nike also currently faces greater domestic competition from the likes of Adidas (OTC:ADDYY) and Under Armour (NYSE:UAA) , along with new shopping habits that forced a slow transition away from brick-and-mortar retailers such as Dick’s Sporting Goods (NYSE:DKS) .

Nevertheless, Nike’s overall sales climbed 5% last quarter, driven by international expansion. But as most investors know, past performance is no indication of future success.

Latest Outlook

For the soon-to-be-reported quarter, our current consensus estimates are calling for Nike to post revenue of $8.83 billion, which would mark a 4.7% climb. Meanwhile, after a downturn in the previous quarter, Nike’s third-quarter earnings are projected to plummet 23.5% to hit $0.52 per share.

With that said, the raw top and bottom line projections do not tell the whole story. Investors still need to know a lot more if they are considering buying Nike ahead of Thursday’s earnings release.

Earnings ESP Whispers

One thing many investors often consider is if a company is likely to top its earnings estimates—as an earnings beat can sometimes lead to positive stock performance in the immediate aftermath of a report. Luckily for investors, we can turn to our Earnings ESP figures to gain a better understanding of Nike’s chances to surprise.

Zacks Earnings ESP (Expected Surprise Prediction) looks to find earnings surprises by focusing on the most recent analyst estimates. This is done because, generally speaking, when an analyst posts an estimate right before an earnings release, it means that they have fresh information which could potentially be more accurate than what analysts thought about a company two or three months ago.

A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.

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Nike is currently a Zacks Rank #3 (Hold) and sports an Earnings ESP of -1.15%, which means earnings estimates have been lower directly ahead of NKE’s Q3 results. This means that Nike is a stock that could disappoint investors this week.

Price Performance and Surprise History

With that said, despite Nike’s negative ESP figure, the company’s history does show that Nike seems like it will do everything in its power to try to meet or top earnings estimates. But do these earnings beats result in at least a short-term boost in stock price? Here’s a look at the trend:

As investors can see, Nike has posted an impressive streak of earnings beats, including an average earnings surprise of 22.48% in the trailing four periods. Nike has also successfully met or surpassed earnings estimates in 20-consecutive quarters. However, a positive earnings surprise has not always resulted in an immediate surge in share prices.

More importantly, shareholders should keep an eye on Nike’s sluggishness in North America and growth in key international markets when it reports. Nike is set to report its fiscal third quarter 2018 earnings results after market close on Thursday, March 22.

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