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Mar 21, 2017

S3 BLACKLIGHT: Record Short Interest Ahead of Nike’s Earnings Release

With Adidas (ADS GR), Puma (PUM GR), Under Armour (UA US), Asics Corp (7936 JP) and even Kanye West poaching North American market share from Nike (NKE US), short sellers have been building their positions since mid-2016. Short selling has not slowed down ahead of Nike’s earnings announcement on March 21st with short interest up $774 million, or 62%, for the year. In fact, Nike short interest has hit a historical high this week, topping $2 billion for the first time.

Analysts are expecting Q3 revenues of $8.5 billion and EPS of $0.526, but $2.02 billion worth of shorts are hoping for a miss on the downside. Shorts did well in NKE stock in 2016, making $237.7 million in net of financing mark to market profits, a 22.87% return on an average short position of $1.04 billion, as NKE’s stock price fell 18.67% for the year. As NKE’s stock price rose 15.44% in 2017, short sellers not only held onto their positions, but vigorously sold into the rally even though they incurred mark to market losses of $205.7 million, a -13.20% return on an average short position of $1.56 billion. Having given back almost all of their 2016 gains, shorts are betting on an earnings miss to stay in the black.

NKE continues to be the outright leader in the athletic footwear, apparel and equipment sector with 2016 revenues of $32.4 billion, an amount just slightly less than its nearest four rivals with $33.1 billion in combined total revenues. Even more impressive is NKE’s operating margin of 13.9% compared to the range of operating margins of its top four rivals - between 3.5% and 8.7%.

With North America making up 45% of NKE’s sales, and being it’s most volatile and competitive market place, NKE is pushing its international expansion, especially China where it derives less than 12% of its total sales. The allure of entering higher margin regions such as China is partially offset with production, supply and regulatory/tax issues. Geographic sales diversity also comes with the geo-political risk of currency exposure. The recently strengthening of the U.S. dollar may make overseas sales a volatile addition to NKE’s revenue stream.

Short sellers have been reallocating some of their short positions away from NKE’s competitors with short interest in Under Armour, Adidas, Puma and Asics declining from $935 million at the end of 2016 to $663 million today, a drop of $272 million or 29.1%. At $2 billion, NKE’s short position is three times the size of these four competitors. Short sellers are betting that the four David’s have found a soft spot in the sneaker Goliath’s defenses.

NKE’s reported earnings will move its price one way or the other after the close today, and with each 1% move up or down generating $20 million of profits or losses for NKE’s short sellers. Shorts are definitely hoping that this afternoon NKE “just misses it.”

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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