It is one of the most frustrating things for any shareholder when the company they own stock in reports a beat of expectations, both in terms of earnings per share (EPS) and revenues, and yet the stock loses a percentage point or two, maybe more, in premarket trading. Sometimes there is an obvious reason, but quite often, the reasons for the drop that you hear on financial TV or read on websites seem a bit of a stretch. They give the impression of being excuses that highlight small things that really should be overshadowed by the overall picture.
Many Nike (NKE) shareholders may be feeling this way this morning. The athletic apparel giant released earnings after the market closed yesterday that showed EPS of $0.90 versus expectations for $0.81 on revenue of $12.23 billion versus the forecast $12.06 billion. Those are good numbers, and the good news didn’t end there.
Nike CFO Matthew Friend commented on consumer trends: “we’re not seeing signs of pullback at this point in time…”
One would think the stock would pop in response to those comments. Instead, we got this.
The kneejerk reaction to the headline EPS and Revenue numbers was a move higher, but that lasted only a few minutes. By the time the earnings call with analysts got underway at 5:00 pm, NKE was trading right around where it had been before the numbers, and the market was clearly waiting for some clarification on a couple of points. Obviously, they didn’t like what they heard when that came, and the stock fell out of bed during that call.
There are several reasons for the drop.
“Margins were lower than anticipated,” “shipping costs are still elevated,” “the supply chain is still disrupted,” and” there was a big inventory build,” are all things I have heard. They are all true to some extent, but lower margins are directly attributable to higher logistics costs, and anyone who has bought a gallon of gas or diesel recently could have told you that costs are still high. As for the supply chain, China has been in lockdown, at least some parts of it have been, and most of Nike’s products are made there. In that context, is an inventory build, presumably to ensure smooth supply to stores and to meet customer demand, should there be another setback in China, really a bad thing?
Taken individually, none of the reasons really hold up. They are either entirely predictable, inherently temporary in nature, or both. If predictable, they would have been built into estimates, and a beat shows that they weren’t as bad as was feared. If temporary, then the fact that despite them, Nike still reported a beat bodes well for the future. Still, the fact remains that the stock is lower, even as the major indices are indicating a higher opening this morning, so what gives?
The first thing to remember here is that Nike’s earnings came “off-season.” Most major companies report in a period one to five weeks after the end of each calendar quarter, but they are not required to do that. Some, like Nike, have financial years and quarters that don’t jibe with the calendar. Their last quarter ended on May 31 and they are reporting four weeks after that. That is perfectly normal, but it leads to a situation where they are the only big company reporting on that date, and thus their earnings attract more scrutiny. Given that, the mood of the market gets focused on that one set of numbers, and therefore gets exaggerated.
The problem with Nike’s numbers weren’t really the numbers. It was with how Nike has been valued over the last few years. It is seen as a growth company, even after all these years. Or at least it has been priced as one priced as one, with a trailing P/E of over 60 a year ago. That multiple has come down to be around 27 yesterday, but that is still well above the market average of 17.91 for the Dow and 20.43 for the S&P 500. And yet, after a big post-covid boost that pulled a lot of sales forward, growth has slowed this year and was actually negative on a year-to-year basis in the prior reported quarter.
Put simply, NKE has a problem that is common among stocks right now. It is not about the current performance of the company but is a realization that valuations at the end of last year had got way out of hand, particularly for stocks that gained a boost from covid or its aftermath. Unless economic growth continued, or even accelerated, they had to adjust back at some point.
Now that the Fed is actively trying to slow things down, adjustment is taking place. However, it is nowhere near over. Thus, NKE’s post-earnings move wasn’t really about earnings. It was just about the market receiving confirmation that growth is much slower than it was, and that stocks have to adjust to the new normal. Unfortunately, that means that the market overall may move lower at some point.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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