Citi raised its rating on Nike to “Buy” from “Neutral,” while Barclays gave Nike its “2024 Best Idea” recommendation. Both investment firms cited the potential for Nike to have a margin recovery and brand innovation tied to the 2024 Paris Olympics.
The upgrades come as Nike will report its earnings for the fiscal second quarter ended November 30 on December 21.
At Citi, analyst Paul Lejuez wrote on Monday, “Top-line challenges remain, but we are more optimistic about NKE’s ability to protect EPS in F24/F25 despite a choppy macro.”
Lejuez expects Nike’s EPS improvement to be driven by gross margin recovery beginning in the fiscal second quarter due to lower freight expenses, leaner inventory that will reduce promotion, and the benefit of higher margin DTC growth.
Sales are projected to capitalize on innovations ahead of the Paris Olympics in the summer of 2024. Finally, Lejuez suspects Nike’s profitability will receive support from a “solid position in China despite the volatile macro.”
Citi expects Nike’s Q224 results will show a revenue miss (negative 1 percent versus analyst consensus targets calling for a 1 percent gain) but will exceed expectations in gross margin (positive 140 basis points versus consensus targets calling for a 100 basis point gain).
Lejuez wrote, “Mgmt is likely to take a more conservative view on 2H24 sales (which the mkt anticipates) but also communicate an ability to hit EPS targets with more visible GM gains coming and better SG&A mgmt. A one-of-a-kind brand with visible margin recovery creates a favorable risk/reward in our view.”
Citi raised its price target from $100 to $135.
Shares of Nike were trading up $2.90, or 2.5 percent, to $118.81 Monday in late-afternoon trading. The stock’s 52-week range is between $88.66 and $131.31.
Barclays raised its price target on Nike from $100 to $135, reiterating its “Outperform” rating as it added Nike to its “2024 Best Idea” recommendations.
“We believe FY2Q24 is the inflection moment for NKE,” wrote Barclays’ analyst Adrienne Yih on Monday. “We are raising our NTM PE multiple as we have increased confidence in the potential for margin and EPS upside as NKE recovers from inventory and supply chain pressures.”
Among the catalysts driving Barclay’s upgrade was the potential for margin improvement due to an inventory inflection in Nike’s Q124 quarter, to 713 basis points, improving from 286 basis points in the prior quarter. Yih wrote, “Typically, we see a material positive impact to GM two quarters post the positive inflection quarter.”
Yih also sees margins benefiting as input costs are expected to alleviate in Nike’s Q324 quarter as the brand moves past tough comparisons in the wholesale channel in Q224. Yih stated, “In FY2Q24, NKE wholesale will go up against steep compares from FY2Q23 as the channel experienced +19 percent and +37 percent y/y growth in global and NA wholesale, respectively. We believe this is the bottom as they rightsize inventory to move back toward a pull marketplace.”
Barclays expects DTC growth to re-accelerate. Yih wrote, “DTC growth is currently being hampered by the delayed inventory receipts in calendar 2H22 that resulted in aggressive and frequent product launches creating a tough ‘compare’ to last year’s product launch calendar.”
Growth is also helped by some recovery in China as domestic brands appear to be losing share with renewed interest in Western brands, with Pou Sheng indicating Nike has returned to low double-digit growth.
Finally, Yih believes Nike will benefit from a renewed innovation cycle. The analyst wrote, “NKE has admitted to not having kept pace and not being aggressive enough about innovation. With the 2024 Olympics and 2024 UEFA Euro Championships, we believe NKE is fast-tracking newness and innovation in advance of these global sporting events.”
Photo courtesy Nike/Favia Duby
