NKE: THE EXPECTATIONS GAME

The Nike/Street historical expectations pattern is unique to say the least. It crumbled down in Nike’s 3Q. Two consecutive broken quarters isn’t probable.

Beat, temper, beat, temper, beat… We see this day in, day out – especially in retail. The worst offenders are the junky companies that guide to declining y/y EPS, and then come out, beat it and beat their chest. For example, a company that earned $1.00 last year will guide toward $0.60. Then they come out and actually report $0.80. Still a gnarly quarter with earnings down 20%, and yet there’s no shortage of analysts who will hop on the conference call and congratulate the management team for beating numbers as if they just won the Stanley Cup.

Nike is interestingly different. First off, they don’t give guidance. They give us the info and let us do our jobs. That said, there is a clear precedent for managing expectations – these are two very different things. Clearly, the consensus (including us) got it wrong this quarter. Very wrong.  Ironically, management’s tone hadn’t really changed over the course of the year.  But this quarter was clearly the exception. Check out this analysis…

It looks at each of the past 10 earnings periods and on a rolling 2-quarter basis shows, a) where estimates were 2-quarters out before a print, b) how that estimate changed after the print, and c) where the actual number came in. Sounds confusing, but the chart below should help visualize.

In Nike’s case, there’s a pretty clear trend of Consensus expectations being at a given level, then coming down after management’s comments.  There are two things that makes it different from many other companies. 1) Its earnings actually grow, and 2) More often than not, Actual EPS comes in ahead of where estimates were 4-months prior.

The Street landed at $1.16 for 4Q vs. original expectations of $1.27. Is Nike going to come in ahead of the prior expectation? Probably not. But we don’t think it will miss our $1.20.

NKE: THE EXPECTATIONS GAME - NKE chart