3 Things That Worry Me About Nike's Earnings

Mar.19.12 | About: Nike Inc. (NKE)

Nike (NKE) has a history of beating Wall-Street expectations, and that what usually makes it a good bet ahead of its earnings. Analysts expect the company to earn $1.16 on $5.81 billion revenue. Will the company keep up with its history when it reports earnings on March 22?

Company

Nike

Deckers Outdoor

Current Price

$111

$68

PE

19.08

11.08

Operating Margin

13.12 (%)

$20.68 (%)

Revenue growth

18.40 (%)

40.40 (%)

Earnings growth

2.60 (%)

39.80 (%)

Click to enlarge

Source: Yahoo.finance.com

Most likely yes, as the company will benefit from the release of its new Nike Air Jordan Retro XI sneakers, selling at $180 that has attracted a great deal of interest among Nike's fans. But there are three things that worry me:

  1. A weak economy. Though Nike enjoys a strong brand name that makes demand for its products inelastic, a weak economy can taper consumer enthusiasm, especially in Europe where the economy is expected to be flat at best this year.
  2. Second, rising wages, especially in Asia, where Nike manufactures a substantial part of its sneaker supplies. According to a recent Wall-Street article, wages in China are expected to grow in double digits this year. Will Nike manage to pass these higher wages on to consumers in a weak economy?
  3. 3. Rising materials price. Shoe and apparel materials have been rising and they have been taking a toll on manufacturers that rely on them. Recently, Deckers (DECK) cited higher materials cost for a disappointing earnings report - the stock had a big plunge after the report. Will Nike report similar problems?

The bottom line: Nike is at risk of disappointing this quarter. That's why I will stay away from it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.