Nike earnings: 6 warning signs to watch

Yahoo Finance Live’s Brian Sozzi provides his take on Nike.

Video transcript

[AUDIO LOGO]

BRAD SMITH: Welcome back, everyone. Nike is set to report earnings on Thursday after the market closed. And the report could be ugly, says Brian Sozzi. That's where we find his hot take today. Sozz goes into the swoosh. Tell us why.

BRIAN SOZZI: Yeah, Nike's out-- earnings out on Thursday after the close. Of course, a bellwether company in Nike, and very much in the same breath as FedEx when they reported last week. But I think the market-- while the stock is down about 12% over the past month into this report, I still don't think the market investors understand what we might hear from Nike when they report. We're still-- I think a lot of folks in the Street are positioned for Nike to just report something in line and reaffirm their guidance.

But here are a couple of reasons why none of that might be the case and the tone might be more negative than investors think. First up, bloated retail inventories. Good note out of Jefferies this morning. Just look at how high inventories continue to be in retail. That note out today. And really reaffirmed to me that it's gonna take a while for these retailers to work through inventory. And when we say inventory, that of course, includes Nike sneakers.

Also discounting-- because of those high inventory levels, discounting is intensify to-- is intensifying to clear those inventories. You're seeing discounts pick up at Macy's, Foot Locker, you name it, as these companies try to clear through the stuff through-- before the holiday season.

Also, ignore foreign exchange headwinds at your own risk. A company like Nike, over 60% of their business is, in fact, done internationally. And that is not good-- not a good place to be in when you're seeing the dollar trade near a 20-year high.

To that end, China is weak, too. We're starting to see some weakness-- some sales weakness at retailers coming out of China. Nike is a key player in that China retail market.

Fifth, volatile stock market equals more cautious shoppers this fall. I think this actually started to play out in the second quarter. That's why you saw inventories really start to back up.

And then lastly, Nike could cut its guidance. They're looking for a low double-digit percentage change in revenue, excluding the impact of currency, for the next 12 months or their current fiscal year. That could come down given all those factors I outlined here today.

And a good-- just a good comment by Morgan Stanley's longtime retail Analyst Kimberly Greenberger. She likes the name. She likes Nike longer term. And she sees valuation as fair. But she's looking for more visibility into what the back half of the year might look like for Nike. That back half of the year may not look good when that earnings call gets conveyed in a couple of days.

BRAD SMITH: Yeah, it's a brand that certainly is looking to sell about 65% of its inventory at full price. And then you factor in the inventory that's going out to wholesalers as well and how much their deep discounting and promotional schedules are gonna look over the course of this holiday season, too.

And so I think at the end of the day, it really is gonna come down to not just how much the percentage of items that they're selling at full price, but how they're working through the inventory that's out there, has continued to be a headache for the entire retail industry. You're looking at some of those competitors, too. Not once within a retail earnings report this season or this most recent season, have we not heard about inventory struggles. Conor has been absolutely going ham--

BRIAN SOZZI: Our inventory man.

BRAD SMITH: --on the full-screen graphic and having to update that every single time. So that is, once again, gonna be in focus here.

BRIAN SOZZI: Well, speaking of graphics, fire up are the take for today, ahead of these Nike earnings. And there it is. It is-- wow, that's impressive work by the team right there. Don't try and dunk in the face of an angry bear.

And look, if Nike comes out here beats by a penny or two and reiterates their full year guidance, I'm sure the stock's gonna go up. And you will have probably time to go out there and chase that name. There is no sense in trying to be a hero and getting involved with Nike.

Let's hear what they have to say. Let's see what they're guidance sounds like. Let's see what the tone is from CEO John Donahoe because this would be his first recession, if we do get one. It would be his first recession leading Nike since he took over the company.

BRAD SMITH: Yeah, and of course for Nike, at this juncture, too. I mean, it's retaining market share. But also within China, as we discussed last week in our bull-bear debate on Nike, it's how they're going up against some of the homegrown brands that are in China, where there's clearly this shift that has been emanating a little bit and the consumer appetite to support some of those brands as well.

BRIAN SOZZI: No way you got those Nike's on sale. Those look expensive. They look expensive.

BRAD SMITH: Look, I got-- I'm just glad I got them at retail and not resale. That was the goal with these ones, so.

BRIAN SOZZI: Those are nice. Those are really nice.

BRAD SMITH: Yeah, thanks.