Shares of Nike slid $5.68, or about 2 percent, Friday after the company reported third-quarter sales missed Wall Street’s target due to port congestion in North America and store closures in the EMEA region—both tied to COVID-19. However, analysts generally believe the underlying demand for Nike’s products remains strong and sees top-line momentum resuming in the quarters ahead.

Shares closed Friday at $137.49. The stock saw a strong run-up in 2020, finishing the year at $141.47 after ending 2019 at $101.31. Highlights of Nike’s third quarter ended February 28 include:

  • Sales were up 2.5 percent to $10.4 billion, short of Wall Street’s consensus estimate of $11.03 billion or 9 percent growth. Currency-neutral sales were down one percent. The shortfall was blamed on global container shortages, port congestion delays in North America that delayed inventory arrival by three weeks and temporary store closures in Europe;
  • Net earnings climbed 71.1 percent to $1.45 billion, or 90 cents a share, well above Wall Street’s consensus estimate of 76 cents. The prior year included a 25 cents-per-share charge associated with its transition to a strategic distributor model in South America;
  • Gross margins increased 130 basis points to 45.6 percent, exceeding Wall Street’s consensus target of 44.4 percent. The improvement was driven by higher full-price sell-through and favorable digital mix that offset lower Nike Direct rates and foreign-exchange headwinds;
  • SG&A declined 7 percent overall to 29.4 percent of sales from 32.5 percent a year ago. Some marketing initiatives were shifted to better align with product delivery timelines;
  • By region, sales on a currency-neutral basis declined 11 percent in North America due to port congestion, while EMEA declined 9 percent due to store closures. Currently, 35 percent of EMEA stores are closed. On a currency-neutral basis, Greater China surged 42 percent. APLA declined 8 percent due to the transition of its business in Brazil to a strategic distributor model;
  • Nike digital grew 54 percent, led by strong growth across the brand’s mobile app ecosystem. Women’s drove over-indexing revenue growth for the quarter, including nearly 90 percent growth in Nike Digital. Jordan Brand continued its recovery, growing 15 percent for its third consecutive quarter of double-digit growth;
  • Inventories were up 15 percent at the quarter’s end, largely driven by higher in-transit inventory in North America due to U.S. port congestion and temporary store closures in EMEA. In North America, inventory grew 31 percent due to “extraordinarily high levels” of in-transit inventory, with inventory units in its distribution centers down nearly 20 percent. A “more consistent” inventory flow is expected for the fiscal fourth quarter; and
  • For the current fiscal year ended May 2021, revenue is expected to climb in the low- to mid-teens growth versus prior guidance calling for growth in the low-teens. For the fourth quarter, sales are expected to climb 75 percent against the 38 percent year-ago decline when the pandemic emerged. Growth is seen being supported by strong full-price momentum seen in March, better managing supply constraints, and mid-April targeted EMEA reopenings.

The following is a synopsis of analyst views on the quarter and Nike’s outlook.

›Stifel reaffirmed its “Buy” rating with a $168 price target. Analyst Jim Duffy wrote that Nike’s FY3Q revenue shortfall could be attributed to COVID-19-related disruptions, including container shortages and port congestion in North America and EMEA store closures that were already known. He noted that despite the revenue shortfall, profitability topped expectations, driven by improving gross margins as well as SG&A discipline.

Also encouragingly, marketplace inventories are “exceptionally tight,” and Duffy urged investors to “focus on indicators of a strong pull market,” shown by double-digit ASP (average selling price) growth, the better-than-expected gross margin on higher full-price selling, the 54 percent digital growth and 42 percent currency-neutral growth in China.

Said Duffy, “The supply-side challenges in North America and EMEA retail closure challenges are transient. While FY22 guidance was not provided, we remain confident that NIKE returns towards a normalized model for +HSD (positive high-single-digit) or better sales, with gross margin improvement and SG&A leverage.” 

›RBC Capital Markets reiterated its “Outperform” rating and lifted its price target to $165 from $160. Analyst Kate Fitzsimons estimated that excluding the bottlenecks associated with the challenges at West Coast ports, revenues would have risen closer to 6 percent to 7 percent in the quarter rather than the 3 percent gain. She noted that despite the inventory constraints, digital revenue grew 54 percent on a currency-neutral basis in the quarter on top of 80 percent in the fiscal second quarter. Also encouraging was gross margin coming in better-than-expected due to higher full-price sell-through and favorable digital mix.

Fitzsimons wrote in a note, “Bottom line, we view any pullback of NKE as a buying opportunity, as the 3QF21 revenue miss was largely led by transitory supply constraints. With bottlenecks managed, brand health strong, higher-margin digital resonating, and China outperforming, momentum is healthy headed into accelerating share gains into FY22 and multi-year. In the NT (near term), we expect the 4Q sales and margin outlooks, in particular, are conservative, with the FY21 guidance raise showing the outlook has not dimmed.”

›J.P. Morgan maintained its “Overweight” rating and lifted its price target to $176 from $170. Matt Boss, lead analyst, said the third-quarter sales shortfall was “entirely attributed to transitory” U.S port congestion and EMEA store closures, with management describing the Nike brand as “strong as ever” as evidenced by strength in Greater China and digital.

Boss further noted that despite the third-quarter revenue miss, Nike raised its FY21 revenue guidance to positive low-to-mid-teens, “underpinning confidence in the underlying business.” The 75 percent gain predicted for the fourth quarter topped Wall Street’s expectation of a gain of 65 percent and equated to high-single-digit growth versus the fiscal fourth quarter of 2019. Boss noted that Nike officials indicated that strong underlying momentum “has continued into the spring season,” and they expect to recapture lost sales due to port congestion in the fourth quarter.

Looking further ahead, Boss noted that Nike officials indicated it is “already exceeding our pre-pandemic levels of business and expect the momentum we see to translate into continued strong revenue growth,” reinforcing JP Morgan’s view of a potential upside in future quarters to Nike’s traditional high-single-digit growth rate. Boss also pointed to Nike’s CEO John Donahoe’s comments on Greater China’s healthy rebound, providing “optimism” for similar strong bouncebacks in North America and EMEA.

›Baird Equity Research maintained its “Neutral” rating and kept its price target unchanged at $150. Analyst Jonathan Komp sees the disruptions that led to the third-quarter sales miss as temporary. He noted that within North America, Nike officials expressed confidence in capturing demand during the fiscal fourth quarter that may have been missed due to the three-week shipment delays. EMEA is also expected to rebound quickly as stores reopen with strong demand, evidenced by triple-digit digital growth seen in the region in March.

Komp also pointed to growth drivers, including the 54 percent digital sales growth supported by 90 percent revenue gains in the quarter via Nike’s apps and 90 percent growth for women’s categories on digital. The analyst noted that the digital growth pushed total owned and partner digital mix to 35 percent of sales “while fueling NKE’s strategy to drive member engagement and re-shape the marketplace toward premium channels.”

Other ongoing growth drivers include women’s in general, Jordan Brand, owned retail with several new formats rolling out and benefits from investments in data analytics in driving customer engagement and improving planning. Wrote Komp, “While investors largely should look past near-term disruptions, we still prefer a better entry given already very positive sentiment and some uncertainty about potential margin reinvestment and digital glide path.”

›Oppenheimer & Co. reiterated its “Outperform” rating and price target of $150. In a note on March 22, Analyst Brian Nagel wrote that in a follow-up call by his team, Nike management indicated “even more clearly” that supply chain issues that began in the latter part of 2020 stemmed from both a shortage of shipping containers and port congestion on the West Coast. Nike officials indicated they are now “caught up,” with product flowing more efficiently to wholesale partners and company-operated fulfillment centers.

He stated, “Amid supply chain distributions, NKE seemed to prioritize shipments or products to the company’s DTC channel and key, strategic wholesale partners.”

Nagel said that by all indications, underlying demand for Nike products in the U.S. and elsewhere remains strong and is likely picking up further as COVID-19 headwinds begin to abate. He added that the higher Q4 guidance also implies some supply chain disruption relief and potentially stepped-up marketing efforts. Nagel wrote, “We continue to recommend NKE as a top pick within our Consumer Growth and eCommerce coverage. We look upon last week’s pullback in shares as a buying opportunity.”

›UBS reiterated its “Buy” rating at a $183 price target.

UBS hosted a call on March 19 with a “former CEO of a major athletic specialty retailer” and the insider indicated that Nike’s “surprisingly strong margin expansion signals its strategy is working” and largely discounted the sales shortfall. Analyst Jay Sole wrote in a note, “The expert believes Nike will continue to generate strong growth well into CY21 and beyond.”

The expert explained the two biggest revenue months of the year for U.S. athletic specialty retailers are December and February with January typically being a month for rebuilding inventory levels after the Holiday season. Wrote Sole, “Thus the timing of the supply chain disruption was highly inopportune for Nike since it came at a seasonally peak period for deliveries (and sales). Importantly, the expert thinks even though merchandise is arriving late, the goods are still desirable and should sell-through as normal. Plus, he also thinks the sale of these goods will be mostly incremental to 4Q21, rather than pushing some Q4 sales into 1Q22.”

Sole said Nike remains his team’s top pick for 2021. He wrote, “Nike’s investments in product innovation, supply chain speed, and digital are unlocking what is likely a multiyear period of above-average growth.”

›Wells Fargo reiterated its “Outperform” rating at a $157.00 price target.

Analyst Tom Nimic wrote in a note, “High-quality company that can overcome near-term challenges, remain bullish. While the Q3 print shows that NKE isn’t immune from external headwinds (port congestion, mandated lockdowns, etc.), we think these are transitory headwinds that will hopefully be resolved shortly. Furthermore, the strong results in China show how the brand is resonating in regions that aren’t facing COVID-related disruptions (boding well for the recovery in the rest of the world). Ultimately, this print doesn’t change our thesis at all: NKE is an extremely well-run company with robust, high-visibility long-term sales/EPS growth potential (driven by the Consumer Direct initiative). All in, we raise our FY21/FY22 EPS forecasts to $3.00/$3.80 (from $2.78/$3.55).”

 

Photo courtesy Nike