Wednesday night saw two greats of the college basketball world square off when #1 Duke took on #8 North Carolina. Less than 40 seconds into the game disaster struck for both Duke and Nike (NKE) , when Duke star Zion Williamson went down with a knee injury while wearing a pair of Nike shoes. Duke players are required to wear Nike shoes due to a contract between Nike and the university. Now rumors are floating around with a driving thesis that Zion could possibly sue Nike.
The loss last night appears to be worse for Duke in my view. Is it a negative for Nike? Sure. The company not only sells shoes and athletic apparel but also dreams, so when a young player, arguably the best player in college, goes down with an injury potentially due to a faulty shoe, it creates a perception problem. In terms of a financial issue, I don't see it as a reason to sell the stock. Even if Nike is sued, what kind of settlement are we looking at for the case? Obviously, I don't think it would ever get to court, but Nike has sales near $40 billion per year with net income tilting the scales around $4 billion. Even if the company paid out an absurd amount of money (think $20 million), we're talking about an impact of a penny per share on EPS.
And before we get hung up on the $20 million, it's a random number, but gives us an idea that every $20 million impacts EPS by a penny. And I don't think we'd see a seven or eight figure number unless the kid's career was completely off the table. I suppose we'll know more about that today or tomorrow, but initial reports don't make that sound like a possibility.
Nike's bigger concerns are perception and its contracts with schools. Reactions and the memory of the shoe blowout will fade. It will make some highlight reels along with some memes in the future, but people will forget. Renegotiating a future contract with Duke will be the biggest challenge (in 2027), but the incident is an isolated one at the moment. Unless we see shoes blowing out becoming a weekly or monthly occurrence, today's small gap lower means very little.
I'm more interested in how the company continues to perform in China along with the current technical picture on the weekly chart. Nike traders have created a huge cup and handle pattern with winter 2018 forming the cup and the handle currently forming. If Nike continues to trade in a tight $82-$86 range for a few more weeks, we have a pretty clear technical picture to watch. Should Nike close under $82, then we can look for downside to $75. If shares close above $86, then bulls can target $100 on the upside. I'd be patient and wait for a trigger. With shares trading around $84, it's a coin flip for the ultimate break and no real advantage if you are looking to short into support or buy into resistance as it is $2 either way.
For now, there's no reason to blow last night's story out of proportion. Be patient and wait for a more telling trigger.