(By Rich Bieglmeier) One of the world's most recognizable brands reports earnings after the market closes on Thursday, June 28, 2012. The just do it athletic apparel company will be highly watched as a barometer for other international and consumers equities.
) will give investors a hint at what to expect from a rising dollar's impact on earnings, along with some insight into consumers spending – especially late in the quarter as the jobs picture became more uncertain.
Wall Street is expecting Nike to earn $1.37 for its 4th quarter. The iStock iEstimate is $1.38, a penny upside surprise.
While our estimate is slightly ahead of the street's consensus view, we see a few looming risks that could make for a disappointing Thursday afternoon for shareholders.
As we mentioned up top, the rise of the dollar could reduce NKE's bottom line. NIKE entities purchase product from NIKE Trading Company (NTC) or directly from factories in dollars. In both cases, a rising dollar hurts profitability.
On the flip side, factory input costs reduce drag on eps as the dollars heads north. Of course, management tries to mitigate the impact of currency fluctuation with hedging strategies; however, iStock believes it would have been difficult for the company to anticipate the Euro crisis' effect on the dollar. Don't be too surprised to see a couple of cents shaved off of earnings due to the dollar.
More pressure could come from compressed margins as every single region saw inventories rise year-over-year, in the third quarter. To some degree, that's alarming as the 3rd quarter includes the Christmas shopping season. It's one thing to see accounts receivables go up, but inventories rising by a low of 12% in North America to a high of 50% in China, has the lookout radar on high alert.
If the dusty stuff gets moved off the shelves at discounted prices, lower margins will equal smaller profits. Of course, some of the buildup could be attributable to new releases and in anticipation of higher demand as a result of Euro 2012 and, the Summer Olympics in London. Then again, the deteriorating global economy could have consumers delaying or putting off purchases.
Our guess is that buyers are getting squeezed, and much of the higher inventory levels are a result of lower spending. We'll know with some certainty on Thursday afternoon.
On the plus side, lower gas and food prices have left a few more dollars in the average Joe's pocket. Perhaps, some of the extra bucks have NIKE buyers just doing it a little more than Wall Street expects.
Overall, Nike has only missed Wall Street's view once in the last 16 quarters. With a track record like that, it makes it highly unlikely the apparel and footwear company will fall short of the mark; however, the June announcement has been typically the weakest of the four quarterly checkups. We think our iEstimate is just about right, with more risk to the downside than up as many analysts are cutting their expectations heading into Thursday's news.