Nike (NKE) reported fiscal Q3 earnings on Tuesday evening. Before digging in, of course there are negatives, and there will be negatives going forward. That said, the gist of this release, at least my personal take, would be that the overview has a positive, or optimistic feel. I have no position, so I am not talking my book here. Just a trader/investor with an interest in what works, what does not, and how managers tackle ominous challenges in a decisively negative environment.
What Did Happen
For the quarter ended February 29th (We had one of those this year.), Nike reported adjusted EPS of $0.78 on revenue of $10.1 billion. The numbers significantly beat expectations on both the top and bottom lines. There was year over year growth on both lines as well, even as the impact of the coronavirus certainly did negatively impact both sales and margin.
The real sales growth was seen in Nike's direct to consumer business that grew 13% during the quarter. This business itself was supported by a very robust 36% increase in digital sales. Sales in North America were also positive, sporting 4% growth, primarily in footwear and apparel. Among the firm's primary brands, both Nike (+6%) and Converse (+11%) experienced impressive (for the times) revenue growth.
Now, about the virus. For the quarter reported, Nike shows sales "growth" of -5% in their Greater China region. This broke a streak of 22 consecutive quarter of positive growth for the firm in that part of the world, and came after the firm had been experiencing double digit sale growth over the first two months of said quarter. At the peak of the spread in February, close to 75% of Nike stores in that region were closed. As of yesterday (Tuesday), 80% of retail outlets in that region are now open. The firm says that digital sales growth for Greater China approached triple digits.
New CEO John Donohue mentioned a playbook that the firm used for not just China, but for most of its Asian markets, that can now deploy across other regions as Covid-19 impacts the normal course of business. Donohue outlined three phases that the firm goes through...
1) Recovery. Store start to reopen.
2) Supply and Demand start to recover themselves.
3) Sales growth returns.
The trick to these phases, if there is one, I would think would be in both staffing and in logistics. Nike is fortunate in that regard, as the firm does run with significant consumer contact in China, so supply and demand can lean upon each other. For firms that manufacture on one continent and sell on others, the plan, recovery might be far uglier. That said, as North America enters still what must be considered the early innings of economic shut-down, even Nike with their knowledge earned, can probably not apply the exact same model without unexpected twists.
There are two other items that I think of interest here. One would be the postponement of the 2020 Summer Olympics in Tokyo. This is a postponement of great marketing opportunity for a firm like Nike. The negative impact would be in lost generation of sales. That will not be felt immediately by investors and has likely already been priced into the stock price. What may be beneficial to the firm in the short run will be the savings from a reduction in having to advertise at that level in a year where funds may need to be allocated otherwise.
Secondly, the firm reduced subscription fees for NTC premium services. This is a provider of streaming fitness videos that put those shut-in in contact with exercise tips form personal trainers. Certainly, I would think this to be an opportunity in this environment to gain a clientele that might just stay with the firm longer term. That's recurring revenue.
Readers will quickly see the shares lurching into a zone that had been the stock's trading range for the first nine moths of 2019. Can that range hold? Relative Strength has surged into a semi-normal reading over the past two days, supported by a suddenly improved looking daily MACD. You might think the shares pop if the fiscal package does well in the House. You might think that the algorithms that control pricing in 2020 might turn against stocks in general should the House slow down the process, or if Initial Jobless Claims tomorrow (Thursday) are as awful as many think.
That said, I think any strategy has to be short-term and not include large equity risk. For me, maybe getting long a Bear Put Spread that would expire this Friday might be of interest.
Idea (minimal lots)
- Purchase one NKE March 27th $80 put for a rough $2.75.
- Sell (write) one NKE March 27th $75 put for maybe $1.10.
Net debit: $1.65
Note: The trader in this example is basically betting $1.65 to try to win back $5 by Friday should NKE close below $75 that day. This is a minimal risk way to play the downside without actually shorting equity, which I would be very uncomfortable with right now.