Sports apparel company Nike (NYSE:NKE) reports earnings for the quarter ending Aug. 31, 2011, on Thursday after the market closes. Retail stocks are rebounding nicely in September, but weak guidance from Lululemon (NASDAQ:LULU) might foreshadow trouble for Nike.
The market clearly is uncomfortable at current levels. One week we go up, only to retest the lows the next week. The bears are expecting a significant slowdown in the economy. The bulls believe we have seen the worst of it.
Who will be right? With third-quarter earnings season set to begin in early October, we will soon find out. In the interim, a handful of companies — Nike among them — are reporting results that will give us clues as to the future direction of the market.
Nike has exceeded Wall Street estimates in three of the past four quarters:
When Nike reported results for the quarter ending May 31, shares soared. The glowing report did include a warning that higher manufacturing costs would eat into future profits into 2012. With the warning, analysts reduced guidance for the current quarter.
The average Wall Street estimate is for Nike to make $1.21 per share. That number is eight cents lower than the $1.29 per share estimate 90 days ago. For the full year ending May 31, 2012, the company is expected to make $4.83 per share. In the last fiscal year, Nike made a profit of $4.17 per share.
At current prices, NKE shares trade for 22 times trailing earnings and 19 times forward earnings. The expected year-over-year profit growth rate is 16%.
Given the strong operating performance during the past year, it should be no surprise that shares of Nike have gained 16%:
Nike’s earnings report comes at a time when the market is in rally mode. During the past week, stocks have gained impressively, with the only blip coming on Monday. Shares of Nike have participated in the rally, with shares spiking to above $90 per share. Those gains have Nike at a premium valuation relative to its expected growth rate.
Using Lululemon’s reduced guidance as a guide, it would be surprising to see Nike be anything but cautious in the current report. The company previously suggested profit margins would be hit by higher manufacturing costs. Will the strong brand equity in the Swoosh be enough to propel shares higher from here?
At the time Lululemon reported its results on Sept. 8, shares traded for 50 times current-year estimates, with expected profit growth of 27%. The reduction in earnings pierced the bubble somewhat, but shares now trade well above pre-earnings levels thanks to a rally in stocks.
Nike trades for a much more reasonable valuation. Current quarter estimates have been sliced, setting the table for an earnings beat on Thursday. A particularly strong report could impress investors to the point of pushing shares up 5% or more.
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