Nike (NKE) – Swoosh?

by Dan September 23, 2016 1:56 pm • Trade Ideas

Event: Nike (NKE) reports fiscal Q1 results Tuesday after the close. The options market is implying about a 4.25% one day post earnings move. With the stock at $55.50, the Sept30th weekly 55.50 strangle (the call premium + the put premium) is offered at about $2.65, if you bought that, and thus the implied weekly move you would need a rally above $58.15, or a decline below $52.85 to make money. The average one day post earnings move over the last 4 quarters has been about 4.7%, which is basically inline with the average one day post earnings move over the last 10 years of 4.8%.

Expectations: Today a NKE research analyst at brokerage firm Canaccord Genuity offered up some reasons for concerns into the print, per Barron’s Tech Trader blog:

Our concerns on Nike are mounting. While FQ1 results to be released Tuesday, Sept. 27 after the market close will likely top consensus EPS of 56c (we’re at 58c) due to the highly conservative guidance issued last quarter, we believe the more important metric to watch will be futures orders. We expect global constant currency futures to decelerate to 5.6% due to five factors including:

1) increasing competitive pressures from Adidas and Under Armour (UA) impacting orders;

2) lack of exciting new product to warrant increased shelf space allocation;

3) price reductions on Nike Signature basketball not likely to be made up by unit growth;

4) inventory building in China and Western Europe; and

5) post-Olympics deceleration of orders. Taking these factors into consideration, we are lowering our F2017 sales/EPS estimates from 7.9%/ $2.38 to 6%/$2.32 as we do not see the 2H revenue acceleration implied in company guidance materializing.

Price Action / Technicals: NKE has been a standout under-performer in 2016, down about 11% ytd and down 18% from its all time highs made in late December. I suspect the rally in shares of Apple (AAPL) over the last two weeks (up 13%) has caused some investors to seek out other high quality laggards, which NKE could clearly fall into this category.

The stock is at a fairly crucial spot on the chart. Near term the stock has decent technical support at $54ish:

NKE ytd chart from Bloomberg
NKE ytd chart from Bloomberg

Taking a slightly longer term view, it becomes clear that the near term support also lines up with long term support, with the uptrend that has been in place since late 2012:

NKE 5yr chart from Bloomberg
NKE 5yr chart from Bloomberg

My Take into the Print: The relative under-performance to the broad market is pronounced. Couple that with the poor performance by Under Armour (UA), down 5% on the year, and down 27% from its 52 week highs and Lululemon’s (LULU) recent 20% decline from its 52 week highs in August, it may be a trend.  This morning Finish Line (FINL) lowered their second half outlook, citing a slowdown in September sales.

NKE trades 23x expected fiscal 2017 eps growth of 11%, and as the Canaccord analyst highlighted above, a continuation of weak trends would clearly call further multiple compression.

If the company were to just come in line, and offer weaker than expected FY2017 guidance, then the stock will be back at $50 very quickly. I want to target that level with a trade structure that looks to offset the near term inflation of options prices into the print.

So what’s the trade?

*NKE ($55.40) Buy Oct 55/ 50 Put Spread for $1.25
  • Buy to open 1 Oct 55 put for 1.55
  • Sell to open 1 Oct 50 puts at 30 cents

Break-even on Oct Expiration:

Profits:  between 53.75 and 50 of up to 3.75, with max profit of 3.75 below 50

Losses: up to 1.25 between 53.75 and 55, with max loss of 1.25 at 55 or higher. 

Rationale:  risking 2.25% of the stock price to possibly make up to 3x your money if the stock finally breaks down below important technical support. This is somewhat of a binary trade into earnings so the risk is that the trade could basically be worthless is NKE were to beat and guide higher. The other trade we looked at was the Oct 55/50/45 put fly, that lowers the overall cost of the trade to about 1.00. It’s a good trade as well but you would need to be patient for all your gains over the next few weeks if the stock did break lower towards 50.