Analysts reduced their price targets for Nike after the company warned that gross margins would remain under pressure over the next few quarters as promotions would be required to clear bloated inventories. Most still held positive ratings on the stock on faith in Nike’s long-term fundamentals.

Shares of Nike fell $12.21, or 12.8 percent to $83.12 Friday after the release of first-quarter results and the outlook update. On Monday, shares showed some recovery, closing at $85.40, up 2.28.

Highlights of the fiscal first quarter ending August 31 include:

  • Revenues increased 3.6 percent to $12.7 billion and were up 10 percent on a currency-neutral basis. Sales were ahead of Wall Street’s consensus estimate of $12.29 billion.
  • Net income declined 21.7 percent to $1.5 billion, or 93 cents a share, just ahead of Wall Street’s consensus estimate of 92 cents.
  • Gross margin in the quarter decreased 220 basis points to 44.3 percent. The decline was primarily due to elevated freight and logistics costs, higher markdowns in North America and foreign currency exchange pressures.
  • Nike Direct sales were $5.1 billion, up 14 percent on a currency-neutral basis. Nike Brand Digital sales increased 23 percent on a currency-neutral basis. Wholesale revenues were up 8 percent on a currency-neutral basis, with growth due to improved levels of the available supply of inventory for partners.
  • By region on a currency-neutral basis, revenue grew 17 percent in EMEA, 16 percent in APLA and 13 percent in North America while declining 13 percent in Greater China.
  • Inventories ended the quarter ahead 44 percent year-over-year, including 65 percent in North America, its largest market. The excess inventory primarily relates to apparel products.
  • Month-to-date retail sales in September were up double-digits versus the prior year, following a strong back-to-school season.
  • For its fiscal year ended May 2024, Nike expects currency-neutral revenue growth of low-double-digits versus the prior year, equating to reported revenue growth of low-to mid-single-digits versus the prior year, assuming the 800 basis points of currency headwinds.
  • Gross margins for the fiscal year are now expected to decline between 200-to- 250 basis points (negative 50 basis points to flat previously). The erosion reflects approximately 150 basis points from higher markdowns and higher off-price mix to liquidate elevated inventory, a second straight year of more than 100 basis points of headwinds from elevated freight and logistics costs and 70 basis points of foreign exchange pressure.

 Matt Boss at JP Morgan reiterated his “Buy” rating while lowering his price target to $120 from $130. Boss noted that Nike’s inventory imbalance ties back to the factory closures last summer in Vietnam and Indonesia, with Nike relying nearly entirely on ocean freight to bring in goods with air freight “not feasible” given Nike’s size. As a result, the recent improvement in transit times “compounded” challenges for Nike.

Boss still said gross profit dollars exceeded JP Morgan’s model in 1Q as sequential improvement in top-line trends as the quarter progressed and September to-date acceleration more than offset incremental inventory actions and FX headwind.

Boss noted, “We see NKE’s brand momentum across geographies as sustainable and providing insulation to macro volatility and supporting high-single-digit to low-double-digit top-line growth. We view this, combined with continued gross margin expansion (increased full-price selling, favorable DTC mix), driving multi-year mid- to high-teens sustainable EPS growth.”

Deutsche Bank’s Gabriella Carbone reiterated its “Buy” rating on Nike but lowered the price target to $99 from $123. Carbone wrote, “Ultimately, we expect investor sentiment to be mixed post-print.”

She sees bulls pointing to Nike’s management’s “prudent” gross margin guidance, the improving trends in China, and strong demand in North America, with double-digit growth seen in September. The bears will point to low visibility around China’s recovery, excess inventory that may longer-than-expected to liquidate and the stock’s still high relative multiple.

Carbone continued, “Overall, while there are certainly transitory issues that the company is working through (elevated inventories, promotional activity, FX headwinds, and high freight and logistics costs), demand for NKE product remains strong (showcasing underlying strength), which leaves us encouraged that the company could experience outsized margin gains in the out-years as costs moderate, FX headwinds abate, and tighter inventories help drive full price realization.”

Tom Nikic, at Wedbush Securities, maintained his “Outperform” rating while lowering his price target to $101 from $121. Nikic said that results were “worse than we expected” even though Wedbush had seen signs of elevated promotions in the marketplace. On the positive side, EMEA and APLA saw strong momentum in the quarter and China showed improvement, but North America faced “intense” promotional activity.

Nikic wrote, “We do have confidence in NKE’s ability to navigate choppy waters and emerge more rapidly from the current disruption than most other brands we cover. Our hope would be that numbers are now properly re-set, in which case the path higher for the stock involves 1) China returning to growth (the compare gets 25 points easier in Q2), 2) inventory growth moderating (particularly in North America), 3) demand being kick-started by upcoming sporting events (e.g., the upcoming World Cup), and 4) a positive consumer response to new innovations such as the Air Max Scorpion in footwear and the Nike Forward apparel innovation (such as how the Vapormax and the Air Max 270 helped Nike out of their “funk” in 2018).”

Adrienne Yih, at Barclays, maintained her “Neutral” rating on Nike while lowering her price target to $83 from $110. Yih wrote, “To quote Robert Frost, the only way out is through. NKE finds itself in the unenviable position of having to get to the other side of an excess inventory cycle. While initially the inventory excess was contained in the Greater China market, this quarter it became evident that late receipts of multiple seasons of goods, combined with earlier-than-expected receipts of fall/holiday product, has created a perfect storm of excess supply over demand in NA as well.”

Yih noted that although Nike is planning to increase promotions and tap off-price channels to liquidate inventory, the risk is “potential contagion into both footwear and other geographic regions that may be facing demand destruction over the coming quarters.”

Yih also wrote that she saw “more cautious on future demand” in the EMEA region with potential higher oil prices. She also said that while China came in better than expected, no estimates were provided on when the region would return to positive growth.

Yih said, “Digesting the new data points from this quarterly call, we are incrementally more negative on the medium term, inclusive of potential risk to FY24, and a slower rebound on the other side of what are expected to be transitory issues in FY25 and beyond. We fully believe in NKE’s global dominance as a brand, their technologically-driven innovation pipeline, digital/DTC strategy, and long-term growth trajectory but given the lack of visibility on earnings upside and margin expansion, we remain at EW.”

Jim Duffy at Stifel reiterated his “Buy” rating and his $110 price target. Duffy wrote that ballooning inventories overshadowed a first-quarter revenue and earnings beat that was supported by strong back-to-school demand, continued DTC and digital strength, and better-than-feared Greater China results. Duffy estimates that Nike has $2.4 billion in excess inventory, of which approximately $900 million is scheduled for aggressive clearance. Stifel expects Nike’s inventory levels will realign by the end of the fiscal year.

Duffy was still encouraged by “strong evidence of brand vitality,” predicting a return to low double-digit revenue growth with gross margin and SG&A leverage for FY25. He wrote in a note, “We reaffirm our Buy rating in recognition of the brand relevance that can transcend beyond near-term challenges and potential for accelerating revenue and expanding margins in FY24. Given NIKE’s track record for successfully navigating difficult macro environments, we are comfortable extending our time horizon for valuation to FY24.”

At Williams Trading, Sam Poser reiterated his “Hold” rating on Nike and reduced his price target to $79 from $100.

Poser wrote in a note, “Nike is challenged by ongoing logistic missteps, which began when shortly after the 15-week pandemic related factory shutdowns in Vietnam and Indonesia last fall. We believe, but cannot confirm that many tenured operations staff with strong relations with factories, shipping companies, freight forwarders and others were replaced with less seasoned employees prior to last year’s factory closures.”

To clear excess inventory, Poser said proprietary checks indicated Nike will hold additional MAP holidays this fall and permit 25 percent off promotions as compared to allowing only 20 percent off in the past. He wrote, “Demand does not appear to be a problem for Nike, but its supply chain logistics does.”

Poser reiterated his “Hold” rating due to Nike’s stock’s still high multiple and “ongoing lack of visibility for the balance of FY23.”

Cowen’s John Kernan maintained his “Outperform” rating on Nike and reduced his price target to  $114 from $127. He wrote in a note, “Nike is at a point of strength from a top-line perspective, and we think China could return to growth by Q2.”

However, Cowen is now modeling FY23 EBIT margin of 12 percent for the current fiscal year, suggesting long-term EBIT margin targets of high teens will “likely need to be pushed out.”

Baird’s Jonathan Komp reiterated his “Outperform” rating on Nike while lowering his target price to $100 from $127.

Komp wrote, “Despite our proactive attempts to model current macro risks, NKE negatively surprised by reporting strong global consumer demand, but much greater-than-anticipated inventory (especially North America/apparel) and a significantly lower near-term earnings/margin outlook given actions needed to clear goods plus incremental currency.”

Komp said he’s “optimistic such pressures are transitory” and continues to see Nike benefiting long-term from its execution, digital leadership, and Consumer Direct Acceleration strategy. He wrote, ‘Despite the disappointing current setback, for investors willing to look further out on a 12-18 month basis, we see an improved risk-reward following the current reset.”

Simeon Siegel, at BMO Capital Markets, maintained his “Outperform” rating while lowering his price target to $110 from $128.

Siegel wrote, “In what’s becoming a painful cycle, NKE again beat revenue/EPS, but missed margins and guided down. N.A. sales beat, but on heavily-compressed margins, with ongoing declines ahead; which begs the question, Why force revenues if they drive EBIT declines? Sell less, Charge more, Make more. And importantly, although DTC grew, both GM and EBIT rates (and dollars) declined (again), furthering our fears of misplaced DTC expectations. Although we still see its scale as Long Term competitive advantage, for today, NKE looks increasingly like other over-inventoried promo-chasing retailers.”

Citi’s Paul Lejuez kept his “Neutral” rating but reduced his target price to $93 from $113.

Lejuez noted that elevated inventory levels and a highly promotional environment in the North American region add to the challenges being seen in Greater China. He wrote in a note, “While the inv buildup is largely due to supply chain timing issues, NKE must walk a fine line between heavy liquidation sales and protecting the health of its brand near and longer-term. Risk remains, even for a strong brand like Nike, particularly if the macro environment weakens further.”

Logo courtesy Nike