Shares of Nike remained under pressure on Monday following the arrival of Foot Locker’s subpar first quarter and the sneaker retailer’s move to slash its outlook for the year. Some analysts also expressed concerns about broader weakness in the U.S. athletic space.
Nike’s stock fell $4.58, or 3.99 percent, to $110.18 on Monday after sliding $4.11, or 3.4 percent to $114.76, on Friday. Shares of Foot Locker lost 9.1 percent Monday after dropping 27 percent on Friday.
“Investor expectations are in the process of being reset even further to a tough ‘macro’ at Nike, Deckers, Dick’s, and Academy Sports in particular,” wrote Cowen analyst John Kernan in a note to investors following Friday’s arrival of Foot Locker’s results.
Specifically addressing Nike’s exposure to Foot Locker, Kernan wrote that allocations from Nike and Jordan are lower as the relationship undergoes a reset, but sell-through of Nike and Jordan were both strong at Foot Locker in Q1, led by signature basketball. Kernan estimates Foot Locker represents 9 percent to 10 percent of total Nike sales in North America and 5 percent to 6 percent globally. He noted that Nike is expected to remain at or above 60 percent of Foot Locker’s revenues after the partnership reset.
Kernan continues to have a “Buy” rating on Nike at a $142 price target. He said that while Nike promotions at Foot Locker are elevated, he views Nike’s fourth-quarter guidance as conservative and the ability to guide to 150 basis points gross margin recovery to begin FY24 as achievable. He is also bullish on an acceleration of Nike’s China business.
Citi’s Paul Lejuez wrote on Monday, “Following FL’s results, we believe a slowdown/inventory overhang in the NAM athletic market reflects poorly on NKE’s F24 prospects. We still believe NAM sales are likely to be down in F24. We model -5 percent (vs cons +4 percent). We are currently modeling GM +280bps for F24 (vs cons +180bps) on the belief that NKE will trade sales for margin. However, given the seemingly high inventory levels in the channel (in footwear in particular) following a pullback in spending from lower-income consumers, we believe the margin setup may not be as favorable as previously thought. While NKE has easy GM comparisons (following an estimated decline of 250bps in F23), we believe there is the risk they will guide to GM expansion below consensus, which would be a negative for the stock when they report at the end of June (though we believe these concerns may pressure the stock near-term as well).
Lejuez has a “Neutral” rating on Nike at a target price of $125.
Williams Trading on Sunday downgraded Nike to a “Sell” with a price target of $95.
Analyst Sam Power wrote, “Nike’s business in the U.S. has become far more difficult than what was expected when 3Q23 earnings were reported in March, and the turnaround in China appears to be choppy.”
Poser expects Nike’s U.S. business will remain challenged through at least the first half of FY24 and suspects consumers may be becoming trained to look for promotions due to a lack of new compelling product from Nike. Poser wrote, “[While] Nike did a stellar job in fiscal 2021 and 2022 building out its DTC/digital capabilities, it appeared unprepared to adjust to a return to in-person shopping. Nike has lost many senior people throughout the entire company with, now necessary, historical institutional knowledge of Nike. As such, Nike’s game today is not as good as it was 5 years ago.”
The analyst said high inventory levels, up 14 percent in the U.S. in its fiscal third quarter ended February 28, will continue to pressure margins with North American sales in the fourth quarter likely to remain down. He suspects FY24 guidance will likely be below current consensus when Nike reports fourth-quarter results in late June due to the near-term margin pressures.
On product, Poser said, “There are not enough compelling new product offerings, and the old product has become stale. Specifically, AirMax running product appears almost dead, and footwear for the moderate channel (family footwear) is stale and will remain stale through the balance of calendar 2023. Also, Nike, both online and in its outlet stores is promoting many styles that are made for premium distribution at prices under $100 that are now competing with shoes sold in the family footwear channel.”
Poser further noted that Nike appears looking to rebuild its moderate business after exiting a number of chains over the last few years and finding challenges maintaining its lower-priced business through its direct-to-consumer channels. He cited reports that Nike plans to reintroduce apparel to Macy’s and Nike footwear at DSW this holiday season and also said sales to Champs are expected to focus on under-$100 footwear models.
Poser overall believes Nike is taking risks with its distribution approach. He wrote, “The current activity is eerily familiar to 2015 and 2016 when Nike stretched the Jordan brand to near over saturation, in order to offset lack of newness in other categories.”
Williams Trading also lowered Foot Locker to a “Sell” and downgraded Hibbett to a “Hold.”
On Sunday, Stifel’s Jim Duffy lowered his full-year revenue, margin estimates and EPS forecast for Nike “to reflect indications of a slowing U.S. consumer and channel inventory imbalances in athletic footwear. Specific to the North America region, adjustments account for 1) softer business with Foot Locker, 2) directionally similar impact with other U.S. channel partners and on the DTC business, and 3) margin impact from a more promotional landscape.”
He estimated Foot Locker North America represents a low double-digit percentage of Nike’s business, but Duffy also believes Nike is facing challenges elsewhere. He added, “Commentary on softening consumer discretionary spend from other U.S. retailers suggests these headwinds unique to the athletic footwear and apparel landscape and Foot Locker.”
Duffy maintained his “Buy” rating on Nike at a target price of $143. The analyst noted that despite the more conservative stance, his FY24 estimates remain above consensus due to a “more ambitious view” of gross margin improvement that he expects will be helped by Nike’s progress in reducing inventories. Duffy said, “We remain confident in NIKE structural drivers and our thesis for margin recovering in FY24+.”
Photo courtesy Nike