Shares of Nike Inc. rose 6.1 percent on Tuesday after the sportswear giant reported fiscal second-quarter results that surpassed Wall Street’s expectations and maintained its guidance for the fiscal year. Analysts were impressed with the performance that was driven by better-than-expected gross margins and accelerated growth in North America although concerns included a steep sales decline in China and the timing of the supply chain recovery.

Shares rose $9.65 to $166.63. The stock started the year at $141.47 and its 52-week range is $125.44 to $179.10.

When Nike released fiscal first-quarter results in late September, Nike’s shares faced pressure as Nike officials reduced their growth outlook for the current year due to COVID-19-driven port congestion and factory shutdowns in Vietnam.

Highlights of the second quarter ended November 31 include:

  • Revenue grew 1.0 percent to $11.4 billion, slightly above Wall Street’s consensus target of $11.25 billion. Sales were flat on a currency-neutral basis.
  • Nike direct sales grew 9 percent on a reported basis and 8 percent on a currency-neutral basis.
  • Nike Brand digital sales increased 12 percent, or 11 percent on a currency-neutral basis, led by 40 percent growth in North America. Nike digital is now 25 percent of total Nike Brand revenue, up three points versus the prior year and more than double the digital mix in fiscal 2019.
  • Nike-owned stores grew 4 percent with significant improvements in traffic and higher conversion rates.
  • Wholesale revenues were down 6 percent on a currency-neutral basis due to optimization of available inventory supply. The decline in wholesale was only one percent in North America despite moves to streamline wholesale accounts.
  • By region, currency-neutral sales grew 12 percent in North America and 6 percent in EMEA while declining 24 percent in Greater China and 6 percent in APLA.
  • Gross margin increased 280 basis points, led by margin expansion in its Nike direct business driven by lower markdowns, a higher mix of full-price sales and changes in foreign currency exchange rates partially offset by lower full-price product margins largely due to increased freight and logistics costs.
  • Selling and administrative expenses increased 15 percent. Marketing expense surged 40 percent, primarily due to the normalization of spending against brand campaigns and continued investments in digital marketing to support heightened digital demand. Operating overhead expenses increased 8 percent due to higher strategic technology investments and wage-related expenses.
  • Net earnings advanced 6.9 percent to $1.34 billion, or 83 cents a share, topping Wall Street’s consensus target of 63 cents.
  • Inventories were up 7 percent compared to the prior-year period, driven by elevated in-transit inventories due to extended lead times from ongoing supply chain disruptions, partially offset by strong consumer demand during the quarter.
  • Factory re-openings in Vietnam are on plan with all factories now operational, and employee attendance rates improving. Weekly footwear and apparel production are at roughly 80 percent of pre-closure volumes and supply is expected to normalize by the summer of 2022.
  • For the fiscal year ended May 31, 2022, revenues are still expected to grow mid-single-digits versus the prior year, gross margin is now expected to expand 150 basis points, up slightly from the previous guidance of 125 basis point improvement, and SG&A is still expected to expand in the mid-to-high teens.

The following is a summary of analyst views on the quarter:

»Credit Suisse kept its “Outperform” rating and its price target at $176.

Analyst Michael Binetti noted the 24 percent decline in revenues in China was “significantly weaker” than expected with Wall Street previously projecting a decline of 12 percent in the region. Binetti said Nike officials suggested COVID restrictions and supply chain/inventory issues caused the majority of the China sales to drop. Nike declined to forecast when China’s growth would return to its previous low-to-mid-teens growth trajectory, which Binetti believes is “needed for the stock to rerate significantly from here.”

However, Binetti is encouraged that marketing is restarting in China with influencers and conversations with Nike’s China distributors suggest innovation is “improving significantly,” suggesting a return to positive growth in China early in the calendar year 2022. He was also impressed by Nike’s strength in North America and EMEA and the gross margin improvement. He added that moves to raise prices will help offset supply chain pressures. Binetti said while Nike is suggesting price increases will only be low-single digits globally, Credit Suisse checks point to double-digit increases in the U.S. for Spring/Fall 2022.

»Guggenheim reiterated its “Buy” rating on Nike and raised its price target to $195 from $180.

Analyst Robert Drbul wrote in a note that while Nike is being impacted by short-term operational dynamics (shipping delays combined with longer-than-expected shutdowns in factories in Vietnam), the long-term financial framework Nike laid out in June remains “quite attainable.”

“We believe the brand remains strong, and, as the supply chain issues improve, we expect the shares to fully recover,” said Drbul. “We are confident the Nike team can leverage its COVID experience to mitigate the negative logistics impacts by employing the seasonless approach to serve the consumer demand.

He also maintained his long-term growth view on Nike’s opportunity in China.

“NKE continues to deliver and innovate products that connect with local consumers by promoting a healthy lifestyle and other important societal themes,” wrote Drbul. “Under the leadership of CEO John Donahoe, Nike is rapidly embarking on the next era of its company history; we expect this to be digitally-led and likely defined by even greater separation vs. industry peers as well as from Nike’s own historical rates of productivity, consumer engagement, and financial performance.“

»BTIG kept its “Neutral” rating on Nike

Analyst Camilo Lyon said the EPS beat was driven by stronger gross margins on strong full-price selling and low markdowns. Top-line growth continues to be led by Nike’s direct business with digital up 11 percent. North America benefited the 40 percent digital growth and improved inventory deliveries during the quarter. Lyon said China’s weakness leads to questions as to whether  “there are broader underlying demand issues that could also be at play such as growing nationalism that favors domestic brands,” citing Anta and Li Ning.

Lyon noted that Nike officials indicated that China is expected to sequentially improve through the balance of the year but declined to forecast when the region would return to growth. He also said Nike continues to be restrained by supply chain issues. Nike expects to return to a more normalized level of inventory by next summer, which he said “could prove somewhat conservative” assuming no further COVID delays.

Wrote Lyons, “As NKE manages through supply chain delays and inventory constraints, the brand strength remains untarnished in most regions (China is TBD) and its digital strategy continues to drive the profit model higher. That said, with accelerated investment spend and limited opportunities to drive revenue upside over the next couple of quarters, we see the risk/reward as balanced and thus maintain our NEUTRAL rating for now.”

»Williams Trading reiterated its “Buy” rating at a $196 price target.

Analyst Sam Poser wrote in a note that based on Nike’s history and his team’s channel checks, the brand will continue to gain market share in the years ahead. Wrote Poser, “All of our checks indicate that the demand for NKE products remain exceptionally high, and the macro supply chain issues will subside, and NKE will emerge stronger and more focused than ever.”

He believes Nike is “well on its way” to achieving EPS of $7 on revenue of $65 billion by FY25.

Stated Poser, ”We are also confident that Nike’s use of data to engage its customers, coupled with the best in class product innovation machine, the balance of science and art, will lead sales and margin growth for the foreseeable future. Remember, as more revenue shifts to DTC, with all other things being equal, less unit sales growth is needed to drive strong revenue growth, which helps even more in the time of supply chain constraints. As a result, we are confident that the Nike and Jordan brands will strengthen, and the sales and margins will continue to increase.”

»Morgan Stanley retained its “Overweight” rating while adjusting its price target to $202 from $206.

Analyst Kimberly Greenberger wrote in a note, “NKE’s ability to deliver on guidance against the backdrop of unprecedented volatility lends credibility to NKE’s path back to its L-T growth & profitability algorithm.”

She cited three catalysts that could drive shares in Nike’s fiscal fourth quarter and fiscal 2023: 1) Key sports events happening in calendar 2022 could boost demand for NKE products ((i.e. Beijing Winter Olympics and the World Cup; 2) Low-single-digit price increases in the second half of the current fiscal year should help boost revenue and mitigate freight-related margin headwinds; and 3) A potentially faster-than-expected normalization of global supply chain congestion could improve inventory availability & delivery through the second half of the current fiscal year.

Greenberger wrote, “Taken together, N-T headwinds are well-understood, and we believe the majority of supply chain disruption is likely behind NKE.”

»Bank of America reiterated its “Neutral” rating at a $170 price target.

Analyst Lorraine Hutchinson wrote that Nike’s outlook in China “remains clouded due to the demand uncertainty following the Xinjiang cotton controversy.” Efforts to ramp up marketing and bring in more localized product should gradually improve sales trends but she said it’s uncertain when the region “will return to the double-digit sales pace at pre-pandemic company leading margins.”

Positives cited by Hutchinson included strong demand in North America and supply chain improvements remaining on schedule. Concluded Hutchinson in her note, “While we are bullish on the long-term prospects for Nike’s accelerated innovation and digital strategy, we see risks to estimates from softness in China that balance the risk/reward.”

»Baird kept its “Outperform” rating on Nike and its price target at $192.

Analyst Jonathan Komp raised his FY22 EPS estimate to $3.62 from $3.40 (Wall Street consensus is $3.52) due to higher revenue in North America and EMEA amid strong full-priced demand offsetting much of the China shortfall

Komp wrote in a note, “NKE delivered a healthy FQ2 beat and signaled higher F2022E EPS including positive holiday season-to-date indications (North America/EMEA sell-throughs +double-digits). We are encouraged to see NKE’s Consumer Direct Acceleration deliver increasing financial benefits across North America and EMEA, which are offsetting near-term challenges in China. Beyond F2022E, more normalized conditions (within China, supply chain) should support a re-acceleration toward NKE’s attractive F2025E growth algorithm (and in our view, above in F2023E) justifying premium valuation.”

»J.P. Morgan maintained its “Overweight” rating while reducing its price target to $185 from $192. Analyst Matt Boss wrote in a note, “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. We rate Nike Overweight.”

Photo courtesy Nike, Nike Live, Eugene, OR