Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Earnings Watch: Can Nike maintain its margin?
Peter Garnry
Chief Investment Strategist
Summary: Nike has had two strong quarters but these rosy days are over with analysts expecting the athletic manufacturer to report only 3% revenue growth in FY23 Q4 and lower operating margin as heavy use of promotions to clear excess inventory have likely impacted profitability. The broader Q2 earnings season starts in little more than two weeks from now with very high earnings expectations for US technology companies driven by the blowout earnings guidance from Nvidia on 24 May.
Key points in this equity note:
- Nike earnings on Thursday will likely reflect lower growth and a lower operating margin due to promotions used to clear excess inventory. Nike’s FY24 guidance on margins is critical for a positive reaction.
- Earnings estimates continue to climb ahead of the Q2 earnings season that starts in mid-July. European earnings estimates are still strong despite STOXX 600 has been weak lately.
- The biggest earnings expectations are in the S&P 500 Information Technology sector following the blowout earnings guidance from Nvidia on 24 May.
Nike’s honeymoon is over
Nike is this week’s key earnings watch and the athletic manufacturer is scheduled to report FY23 Q4 (ending 31 May) on Thursday after the US market has closed. Analysts expect a meagre revenue growth rate of 3% y/y which is quite low given the low base from last year highlighting that the previous two strong quarters were outliers. Analysts expect an EBITDA margin of 11.8% down from 13.5% a year ago reflecting promotions to clear excess inventory, higher supply chain costs and rising wages which are all offsetting lower freight expenses. Investors will focus on FY24 guidance, share of direct channel revenue and whether China is picking up (peers have recently been more positive on China). It will especially be Nike’s FY24 guidance on operating and gross margin that will define the reaction function from investors. Nike shares are down 7% since the last earnings releases reflecting investors have soured on the athletic company.
The other important earnings releases this week are highlighted below.
- Tuesday: Walgreens Boots Alliance, Alimentation Couche-Tard
- Wednesday: Micron Technology, General Mills
- Thursday: H&M, Nike, Paychex, McCormick
- Friday: Constellation Brands
Higher expectations ahead of Q2 earnings
The Q2 earnings season starts in little over two weeks from now and while expectations were low going into the Q1 earnings season back in April expectations this are high. In Europe, the 12-month forward earnings estimate has increased 4% which is a step increased over just three months given that earnings among European companies have grown 5.8% annualised since 2004. Earnings estimates and thus expectations might be running higher, but the performance among European stocks has been lacklustre since late May with STOXX 600 down 4% from its peak. This makes it an interesting setup for European earnings season as investors are clearly more negative than analysts.
The biggest change in earnings estimates has come in the S&P 500 Information Technology sector and especially since the Nvidia earnings release on 24 May in which the graphic processing unit maker announced strong earnings and a blowout guidance driven by high demand for its AI chips. The expectations around AI have been rising across the board for US technology companies, but recent earnings releases from Adobe and Accenture failed to show any change in the underlying growth of their businesses due to AI, so big outstanding question is whether the AI hype is just good for Nvidia and AMD, and then nobody else except maybe for the cloud infrastructure providers such as Google, Amazon, and Microsoft.
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