Some Wall Street analysts were pleased with Nike’s progress in working down inventory levels and reviving China in the fiscal third quarter ended February 28; others were concerned that the growth is mainly from promotions.
Shares of Nike fell 4.9 percent to $119.50 last Thursday on the earnings report and closed Monday at $117.80, down $2.91 on the day. The stock’s 52-week range is between $82.22 and $139.86.
Highlights of the quarter include:
- Revenue increased 19 percent on a constant-currency basis, higher than plan, led by double-digit currency-neutral growth in North America, EMEA and APLA, while Greater China grew 1 percent on a currency-neutral basis due to COVID disruptions in December;
- Currency-neutral sales were up 27 percent in North America, 26 percent in EMEA and 15 percent in APLA;
- Direct revenue grew 22 percent on a constant-currency basis, while wholesale grew 18 percent on a constant-currency basis;
- Gross margin declined 330 basis points, slightly more than anticipated, due to higher markdowns, unfavorable FX, higher input costs, and elevated freight and logistics expenses;
- Due to the topline beat, EPS beat consensus by 23 cents a share;
- Inventory management was strong, up 16 percent versus 43 percent at the close of the fiscal second quarter. The sequential deceleration was more pronounced in North America, up 14 percent versus up 54 percent at the close of the second quarter;
- Nike raised FY23 topline guidance to high-single-digits from mid-single-digits due to the 3Q beat but guided gross margins to come in at the low end of guidance, calling for a decline of 200 basis points to 250 basis points;
- Q4 sales are expected to be flat to low-single-digits +LSD as reported, implying a +MSD increase constant-FX; and
- With inventory in better balance, wholesale growth is expected to slow in the coming quarters.
Piper Sandler kept its rating on Nike at “Neutral” and slightly raised its price target from $105 to S112.
Piper analyst Abbie Zvejnieks wrote that she was encouraged by Nike’s product innovation, although she believes the revenue growth was bolstered by promotional activity and sell-in to wholesale.
She also believes that while Nike is refocusing on the importance of the wholesale channel to meet consumers (such as the family channel), Nike officials’ commentary of moderating wholesale growth over the next few quarters due to reduced inventory commitments for spring and summer product could impact the industry in different ways. Said Zvejnieks, “First, we think this benefits smaller and emerging brands which have struggled to obtain wholesale orders as NKE has flooded the channel, and second, we think this could create difficult compares for retailers which were heavy with NKE promo product this holiday.”
Zvejnieks sees “clear opportunities” for margin expansion for Nike in FY24 as liquidation normalizes, China recovers, FX becomes less of a headwind, and digital penetration gains, but valuation represents a significant premium to peers. She wrote, “As inventory levels normalize, we think revenue growth in North America will normalize to [about low-single, mid-single-digit] growth, and while a recovery in China would be a tailwind both to revenue and margins, we remain uncertain on timing.”
RBC Capital Markets reiterated its “Outperform” rating and its price target of $145.
RBC analyst Piral Dadhania wrote, “3Q23 results confirm Nike’s momentum and execution strength. Broad-based revenue growth (notably North America and EMEA, as we anticipated), even if earnings are either pressured by gross margins or supported by lower-than-expected demand creation expense in the quarter. We view revised FY23E guidance as too conservative on revenue growth and maintain estimates above guide. China should accelerate from here, while ROW should benefit from a strong product pipeline across Performance and Lifestyle. Nike remains the cleanest equity story in our sporting goods coverage.”
Wedbush reiterated its “Outperform” rating and lifted its price target to $145 from $139.
Wedbush analyst, Tom Nikic, trimmed his FY24 EPS estimate to $3.82 from $4.00 in light of the gross margin pressures but cited several factors supporting “bullishness” around Nike’s outlook. He wrote, “Inventory levels are rapidly normalizing, brand heat is high, China is in the early stages of a recovery, and they have multiple gross margin tailwinds for FY24 (freight, logistics, channel mix, China recovery, normalizing markdowns). The stock is expensive, but we continue to view it as a high-quality grind higher” name as EPS growth likely reaccelerates in FY24.”
Barclays upgraded Nike’s stock to “Overweight” from “Neutral” and lifted its price target to $154 from $110.
Barclays’ Adrienne Yih said the upgrade, in part, reflected inventory growth moving in line with sales growth. She wrote, “Our inventory model predicts a positive sales-to-inventory inflection in FY4Q23, which, when combined with positive-to-accelerating sales growth, results in a margin “floor” with a high probability of margin upside.”
She also called out favorable trends in China with two consecutive quarters of constant currency growth and accelerating trends exiting February. Finally, the upgrade reflects Nike’s aggressive moves to clear through higher average unit cost product that should support margin improvement going forward. Yih wrote, “Combining improving freight relief as we enter FY24 with reduced promotional pressure, we believe the visibility on gross margin recapture is significantly improved. Brand strength and a deep pipeline of high heat innovation is driving strong full-price reception to new footwear launches in both the DTC and wholesale channels.”
Citi kept its rating on Nike at “Neutral” while raising its price target from $115 to $125
Citi analyst Paul Lejuez said that although reductions in freight costs, product costs and promotions would support a recovery in gross margins for fiscal 2024, “topline growth will be tougher to come by.” Citi estimates sales growth on a currency-neutral basis of 2 percent for Nike in FY24. Lejuez wrote, “NKE faces difficult comparisons in NAM [North America] and EMEA next year (against inventory restocking/higher promos driving sales), which means topline growth will be mostly reliant on China. With mgmt not providing any clarity on F24 guidance until the end of June, we believe the uncertainty around the top line in F24 will be an overhang on the stock. And with shares trading at an F24E EV/EBITDA multiple of [about] 25x, we believe the risk/reward is balanced.”
TD Cowen reiterated its “Outperform” rating and lifted its price target to $142 from $141.
Cowen’s John Kernan wrote, “Nike laps 350 [basis points] of transitory gross margin impacts from logistics, freight, supply chain, and our above consensus estimates assume 150 [basis points] of recovery in FY24, which could be conservative. Key stock debate and sentiment/model pressure point center on three key factors gross margin recovery, China and the balance of DTC and wholesale.”
Stifel maintained its “Buy” rating on Nike and raised its price target from $132 to $143.
Stifel’s Jim Duffy said the quarter underscored Nike’s “brand vitality and margin improvement potential” for FY24. He was encouraged by the brand momentum in western markets, including 27 percent currency-neutral growth in North America and 26 percent currency-neutral growth in EMEA, China’s improving trend, and progress with inventory rebalancing. Duffy wrote, “We encourage investors to focus on inventory management and out-year earnings power. We have improved confidence inventory issues and related margin pressures will be contained to FY23 and remain confident in opportunities for 400 [basis point] gross margin improvement in FY24 and into FY25.”
Baird Equity Research maintained its “Outperform” rating on Nike and raised its price target to $138 from $130.
Baird’s Jonathan Komp said Nike delivered “another healthy beat” in the quarter, citing the progress on inventories and China’s continued recovery. Komp wrote, “We expect little change to F2023E consensus given higher FQ4 clearance activity and SG&A (possibly conservative?), while F2024E (no formal guide provided) in our view may include lower revenue growth due to wholesale, but strong margin expansion. We are raising EPS estimates while maintaining conservative macroeconomic projections with NKE remaining an attractive idea, in our view, amid an uncertain backdrop.”
BMO Equity Research kept its “outperform” rating and price target to $120.
BMO’s Simeon Siegel wrote, “NKE continues to impressively grow revenues off its already-enormous base. However, we fear flags around margins; revs +14 percent, why was EBIT -13 percent? What’s happening with the growing Corporate Expense bucket? We continue to favor NKE’s size and scale as long-term competitive advantages but remain concerned hopes for meaningful margin growth appear optimistic.”
Williams Trading retained its “Hold” rating while raising its estimates and price target from $111 to $120.
Williams’ Sam Poser wrote, “NKE’s 3Q23 results in North America were better than we expected, and current sales trends appear to be strong as well. However, it’s easy to increase sales velocity when promoting product and when delivering a lot more product than the prior year. At the same time, NKE appears to be making headway with its international businesses, especially in APLA. EMEA is strong as well, but it’s unclear to us how much of that strength is due to more inventory in the marketplace. We agree with management that macro issues are transitory but are unsure how apt consumers will be to pay full price for non-marquee goods that they were buying on sale for a period of time.”
Photo courtesy Nike/ Jordan World of Flight Shibuya, Tokyo