NKE Preview: Chance for Redemption

Nike (NKE - commentary - Trade Now) has a nice looking chart, up nearly 50% from the March low. Of course, that means it is a ho-hum market performer that is doing nothing for the portfolio managers that own it.

Perhaps Nike can redeem itself on Tuesday, when it reports earnings after the close. The Street is looking for EPS of 97 cents on $4.895 billion in sales. Those numbers have been surprisingly stable, with the EPS number up a nickel from where it stood in March. Such stability is amazing given the consumer exposure, the foreign exchange exposure and so forth.

In any case, Nike stock doesn't trade on the reported numbers, but rather the futures orders. The Street is looking for futures orders to decline perhaps 5% year over year before foreign exchange, with an actual dollar decline near 10% due to foreign exchange. Nike is gaining market share in the U.S. in all athletic shoe categories but running, which is offsetting an industrywide slowdown. Most of the athletic shoe retailers reported weak negative comps recently. For instance, Foot Locker (FL - commentary - Trade Now) comped down 12%, while Finish Line (FINL - commentary - Trade Now) was down 10%. Sales in China (one of Nike's biggest regions) appear to be bouncing back with that economy, an important force since China represents a huge proportion of Nike's growth. Putting the Olympics' anniversary in the rearview mirror helps as well.

Analysts expect gross margins to drop significantly, nearly 400 basis points, as input inflation, foreign exchange and promotional pricing pressure all squeeze hard. Conversely, SG&A will also decline perhaps 300 basis points, so the net pressure on the operating margin will not be excessive. Investors will focus on whether the company is keeping inventory under control, since it shrunk less than sales last quarter, engendering some concern among shareholders.

The call starts at 5:00 p.m. EDT.

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At the time of publication, Dvorchak had no positions in the stocks mentioned, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.