Nike's Preemptive Job Cuts

Nike announced that the company will be eliminating 1400 jobs in the coming year. The athletic shoe retailer determined that job cuts were needed for cost savings. The preemptive job cut has me wondering if Nike will be able to meet earnings expectations for next month’s quarterly earnings. Nike has been a bellwether of economic growth by increasing earnings for the past 10 years. The company has traditionally dazzled the market by historically exceeding analyst expectations when it comes to quarterly earnings.

It will be difficult even for a company like Nike to meet its earnings expectations over the next two quarters. For its fiscal 3Q 2009, Nike is expected to report earnings of .82 cents per share. Earnings expectations for the 4Q have not been guided down and are estimated at $1.11. Nike may have a difficult time meeting these earnings expectations because this recession has been longer and deeper than originally expected. The current economic landscape has not been kind to retailers. Nike has been shielded from the economic downturn so far but if the company does miss on its quarterly earnings the stock will be under pressure.

The stock looks cheap trading at $45.05, which is very close to its 52 week low of $42.68, but it may drop even further in the near term. Nike’s shares are only down 25.7% over the past year compared to rivals such as Adidas whose shares are down over 60%.

While shoes are a necessity, expensive athletic footwear is still a discretionary item. If earnings per share come in at $3.89 for FY 2010 the stock would be incredibly cheap at $38 which would give the stock a multiple below 10. This would be well below analyst expectations of $4.14 per share for 2010. I do like Nike’s shares for the long term and continue to hold shares because of its solid financial position, strong brand name and management team.

Disclosure: Author holds positions in NKE

Comments

[Paul Price:]

What are Nike shares worth?

Yopu didn't give any indication of your "fair value" or target price for 1 - 2 years out.

Feb 11 06:49 AM

[Mark Riddix:]

Good question. In a normailized earnings environment Nike's shares trade with a multiple of 18. The shares have traded with a multiple of just under 13 over the past year. The industry average is 9.5 but Nike has a higher ROE, ROA, PM than anyone else in the industry so Nike does warrant a higher multiple. You could conservatively assign Nike a multiple of 11.

Nike has historically been able to grow EPS by 12.9%. If the economy stabilizes over the next two years and Nike can resume its earnings growth then I would expect the company to conservatively grow annual earnings at 8.5% in 2010 and 2011. This would place EPS at about $4.50 for FY 2011 and $4.88 for FY 2012. If you take $4.88 EPS x 11 PE then Nike is easily a $50 stock. These numbers are based on a worst case scenario. If Nike returns to its historical PE over time then this is easily a $90 stock.

Feb 11 01:47 PM