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Nike (NKE) is set to report fourth quarter fiscal 2019 earnings results after the closing bell Thursday. The main question on the mind of investors, to what extent will China tariffs impact the company’s top and bottom lines?

The global athletic footwear and apparel giant has beaten earnings expectations dating back almost seven years. This time could be different, however. China is the company’s second largest market and an estimated 26% of Nike shoes and apparel are manufactured in there. Not everyone on Wall Street is concerned about the tariffs. According to Sam Poser, analyst at Susquehanna Financial Group, less than 10% of what Nike manufactures in China ever make it to the U.S. and subject to the tariffs.

Poser, who has a positive rating on Nike stock with a $100 target, says, “We believe exposure to China in the aforementioned categories that are imported to the U.S. has likely declined even further since the issuance of the 10-K nearly one year ago.” Investors will hope he’s right. Meanwhile, Nike stock still looks attractive when assessing its value on a price-to-earnings basis compared with its peers. Meanwhile, the shares, up just 11% year to date, have underperformed the Dow Jones Industrial Average’s 14% rise.

The aforementioned pressure caused by potential tariffs on China is one reason for the underperformance. So on Thursday Wall Street will want to see even stronger signs that Nike’s direct-to-consumer business, which achieves higher margins than its shipments to wholesalers, can offset any potential weakness, especially as the company has forecasted for gross margins to be better in the second half of the year.

For the quarter that ended May, Wall Street expects the Oregon-based company to earn 66 cents per share on revenue of $10.17 billion. This compares to the year-ago quarter when earnings came to 69 cents per share on revenue of $9.79 billion. For the full year, ending in June, earnings are expected to rise 9% year over year to $2.54 per share, while revenue of $39.1 billion would mark a 7.4% increase year over year.

The management’s decision to re-invest profits back in the business, particularly in digital transformation such as NIKE Direct, has begun to pay dividends as Q3 revenues grew across all of its geographies. NIKE Direct allows the company not only to control the consumer shopping experience, it also allows Nike to collect customer data to help the company move away from a one-size-fits-all model. A tailored experience that is unique to each customer is now the goal.

Nike is also benefiting from its e-commerce investments aimed at its digital transformation where the company is seeing stronger-than-expected demand in both North America and in international markets. On Thursday Nike, which has generated investor enthusiasm about new product launches and sales growth acceleration, must show sustained revenue growth trends, particularly in the U.S. It must also guide in a manner that suggests gross margin expansion in fiscal 2020.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.


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