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Nike turns bearish on lackluster futures orders

Last week, the numero uno footwear manufacturer Nike Inc. (NYSE: NKE) reported fiscal 2016 second-quarter results that beat analysts’ estimates.

Nike also re-affirmed the high-single-digit revenue growth guidance for fiscal 2017. The impressive second-quarter results pushed the stock to a high of $53.35.

However, the stock was unable to consolidate at 53 levels and lost a portion of its gains in the past few trading days. On Tuesday, the stock closed at $51.29. For the reasons provided below, we have a short-term bearish view of the stock.

The leading sports apparel manufacturer reported second-quarter revenues of $8.18 billion, up 6.4% from $7.686 billion in the similar period last year. For the quarter ended November 2016, the Oregon-based company reported net income of $842 million or $0.50 per share, compared with $785 million or $0.45 per share in the similar period of 2015. Analysts expected Nike to report earnings of $0.43 per share on revenues of $8.09 billion.


During the quarter, the gross margin was 44.2%, down 140 basis points from the similar period last year. Increase in product costs, strong dollar and high off-price sales were responsible for the decline in the gross margins.

Whenever Nike reports its quarterly results, the investors would immediately look for the data pertaining to future orders. This data typically indicates the quantum of orders received from its distributors, but remains pending for delivery. While reporting the second-quarter results, the management of Nike stated that the future orders have grown 2% on a currency-neutral basis. This includes a -4% growth in North America. Even though the company insists that future orders no longer reflect the actual business composition of the company, still, the investors are quite concerned about the unimpressive data.

In the US, the company is also facing rising competition from arch rivals such as Adidas and Under Armour. After tying up with basketball (NBA) star Stephen Curry, Under Armour has gained a considerable pie in Nike’s market share. Likewise, the Yeezy collection of Adidas, designed by rapper Kanye West, and the Stan Smith line of retro sneakers are eating into once dominant position of Nike.

For the current quarter, Nike anticipates revenues to grow by the mid-single- digit range. However, the company expects the gross margin to decline by nearly 100 to 125 bps. The SG&A expenses are also forecasted to rise by mid-single to high-single- digit rate. Nike also reconfirmed its revenue outlook for fiscal 2017. The company stated that the revenue would grow at a high-single- digit rate. Furthermore, on a constant currency basis, Nike expects revenues to increase by a high single-digit to low double-digit rate.

The forecast underlines the negative impact of a strong dollar on the topline of the company.

Considering the headwinds faced by the company, on December 5th , Cowen & Co. downgraded the stock from “Outperform” to “Market Perform” rating. Thus, considering the above facts, we forecast a short-term downtrend in the stock.

The price chart shows the existence of resistance at 52.20. The MACD indicator is crossing over to the bearish zone. This reflects the possibility of a price correction in the stock of Nike.

Nike Stock Price: December 27th 2016

Nike Stock Price: December 27th 2016

So, a binary trader should invest in a put option, also referred to as low or below contract, to gain from the value erosion. The below contract can be bought as long as the stock trades above $51.20. Any expiry date around the 6th of January can be selected.

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