Wall Street analysts were impressed with Nike’s ability to deliver better-than-expected earnings for its fiscal third quarter ended February, fueled by continued strong demand and above-plan performances in North America and EMEA regions. Exposure to Russia/Eastern Europe and COVID-related volatility in China were seen as potential headwinds.

On Tuesday after Nike’s results came out Monday evening, shares of Nike rose $2.90, or 2.2 percent, to $133.09. Shares are down about 20 percent on the year after climbing about 18 percent in 2021. Shares closed at $133 Wednesday.

Nike’s shares have faced pressure since Nike officials in September reduced their growth outlook for the current fiscal year due to COVID-19-driven port congestion and factory shutdowns in Vietnam.

Highlights of the third quarter ended February 28 include:

  • Revenues were up 5.0 percent to $10.87 billion, just ahead of Wall Street’s consensus target of $10.6 billion. Sales were up 8 percent on a currency-neutral basis.
  • Nike Direct sales jumped 15 percent on a reported basis and 17 percent on a currency-neutral basis, to $4.6 billion, or 42.3 percent of sales.
  • Nike Brand Digital sales increased 19 percent, or 22 percent on a currency-neutral basis, fueled by strong demand through the Nike app. The digital growth was led by North America, up 33 percent. Double-digit digital growth was also seen in APLA and EMEA, helping offset declines in Greater China.
  • Nike-owned stores grew 14 percent with significant improvements in traffic.
  • Wholesale revenues were down 6 percent on a currency-neutral basis due to optimization of available inventory supply.
  • By region, currency-neutral sales grew 9 percent in North America, 13 percent in EMEA and 19 percent in APLA while sliding 8 percent in China.
  • Gross margin increased 100 basis points versus the prior year, driven primarily by higher Nike Direct margins due to lower markdowns, favorable foreign currency exchange rates and a higher full-price mix, partially offset by increased freight and logistics costs.
  • SG&A grew 13 percent versus the prior year, primarily due to strategic technology investments, normalization of investment against brand campaigns, wage-related expenses and digital marketing investment to fuel heightened digital demand.
  • Earnings slid 3.7 percent to $1.4 billion, or 87 cents a share, from $1.45 billion, or 90 cents a year ago, but surpassed Wall Street’s consensus target of 72 cents.
  • All factories in Vietnam are operational with total footwear and apparel production in line with pre-closure volumes and Nike’s forward-looking demand plans. Transit times, however, remain elevated and have worsened in North America.
  • China’s results for the quarter were in line with expectations, with sequential improvement versus the prior quarter.
  • Nike has reduced the number of wholesale accounts worldwide by more than 50 percent over the past four years as part of a plan to shift away from “undifferentiated” retailers and drive DTC growth and has completed the majority of account exits.
  • Nike continues to expect revenue for its fiscal year ended May 31 to grow mid-single-digits versus the prior year. For the current fourth quarter, a decline in revenue is expected in North America due to year-over-year comparisons. In Greater China, another quarter of sequential improvement is expected assuming the operational impact related to recent COVID lockdowns is minimal. Gross margins for the year are now expected to expand by “at least 150 basis points” from “150 basis points” while SG&A is still expected to expand in the mid-to-high teens.

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

»Morgan Stanley kept its rating at “Overweight” and its price target at $192. The firm raised its 2022 EPS estimate by 4 percent to $3.71 (3.56 in FY21).

Kimberly Greenberger called out the better-than-expected North America and EMEA performance despite supply chain turbulence, the sequential improvement in China’s revenue growth, and continued strong underlying demand for the Nike brand. She wrote in a note, “In our view, consistent beat and raises suggest management is appropriately analyzing the business and setting achievable/beatable financial guidance, fortifying the credibility of NKE’s long term targets with investors. However, despite the beat, our conversations with investors ahead of the print suggested valuation is unlikely to materially re-rate until there’s further clarity on underlying demand trends in Greater China, with investors looking for growth to reaccelerate back to management’s long-term low- to the mid-teens target rate, and the potential impacts to EMEA consumer demand from rising oil prices & the potential knock-on effects from the tragic events in Ukraine.”

»J.P. Morgan maintained its “Overweight” rating while raising its price target to $164.00 from $162. The firm’s EPS target for the current fiscal year was raised from $3.53 to $3.71.

Matt Boss wrote in a note that while Nike intends to provide FY23 guidance on Q422’s conference call, officials appeared optimistic about seeing growth accelerate with Nike CEO John Donahoe citing “extraordinary confidence” in Nike’s innovation pipeline. Boss wrote, “Putting the pieces together – management sees the combination of current brand momentum, including Spring to date full-price sell-through performance, forward product pipeline, with material innovation on tap globally, and margin flow-through tied to Phase 2 of the Marketplace model providing the foundation to execute the model’s financial algorithm, i.e., high-single to low-double top-line/mid- to high-teens bottom line) albeit mindful of continued supply chain/transportation headwinds and current geopolitical volatile.”

»Baird maintained its “Outperform” rating and lowered its price target to  $165 from $192.

Jonathan Komp raised his FY22 estimates on Nike following the quarter’s earnings beat and positive update on full-year targets, supported by expected sequential improvement in China along with easing supply chain constraints. The analyst wrote, “Looking ahead, NKE expressed a bullish outlook supported by current consumer demand, a full innovation pipeline, and proactive marketplace management.” However, estimates for FY23 were trimmed to align closer to NKE’s long-term algorithm amid newer macro-economic uncertainties.

Komp wrote, “We maintain our positive view of NKE’s transformation to a DTC/digital-led organization which has driven customer engagement, elevated brand positioning, and supported margin expansion with meaningful runway remaining. In our view, NKE’s accelerated shift to a digital-led positioning behind its Consumer Direct Acceleration strategy (CDA) to support a return toward the company’s attractive F2025E targeted growth algorithm calling for plus-mid- to high-teens annual EPS growth, after this year, and ROIC expanding above the prior low-30 percent level. With the FQ3 results continuing to show the increasing financial benefits of NKE’s CDA strategy, especially in North America, EMEA, which is helping to offset the near-term headwinds in Greater China, we expect investor sentiment on the stock to remain positive based on prospects for strong growth in F2023E and beyond.”

»BofA Securities reiterated its “Neutral” rating and $140 price target.

On March 15, the investment firm lowered its F22/23E estimates by $0.12/$0.30 to $3.58/$4.22 to reflect exposure to Russia and Eastern Europe and COVID-related volatility in China. BofA at the same time lowered its price target to $140 from $170.

In a note issued March 22, analyst Lorraine Hutchinson wrote that Nike plans to recapture lost sales from exited wholesale accounts over the last four years by improving digital connectivity with existing partners while continuing to lean into their direct to consumer (DTC) channel. She wrote, “The benefits of digital connectivity have been evident at Dick’s.”

She added that despite the Q3 beat and comments that Spring retail sales are off to a strong start, management reiterated its mid-single digit revenue outlook for F22, which includes North America sales down year-over-year in the fourth in 4Q (against year-ago stimulus spending and three weeks of inventory shifting into 4Q last year) and sequential improvement in China. Hutchinson stated, “Continued uncertainty on the long term demand picture in China and a lower F23 earnings outlook vs. consensus keep us at Neutral.”

»Stifel reiterated its “Buy” rating at a $160 price target while slightly downwardly adjusting its revenue and earnings estimates for FY23.

Jim Duffy wrote in a note that DTC (direct-to-consumer) and full-price selling momentum and associated gross margin strength in North America and EMEA drove strong FY3Q upside. He added, “Better than feared Greater China results embolden our view of relative brand health in the region and potential for inflection in FY23 with government stimulus to consumer spending. Importantly, production is reportedly aligned with forecasts underscoring our confidence in acceleration potential into FY23. Our FY23 estimates remain well above consensus though come in slightly due to recent strength of the U.S. dollar. Big picture, we remain impressed with the evolution to a more digital and direct business model with higher margin and return characteristics and continue to view NIKE shares as a solid core holding for growth investors.”

»Cowen kept its “Outperform” rating while raising its price target to $154 from $144. The firm raised its FY23 EPS estimate to $4.41 from $4.23 but remains below Wall Street’s consensus targets.

John Kernel wrote, “Though we still view consensus sell-side estimates for FY23 (for roughly 13 percent reported sales growth and ~25 percent EPS growth) as being lofty relative to where management is likely to issue initial guidance – Nike’s brand and financial model will continue to inflect to management’s long-term targets set last year.”

»Williams Trading kept its “Hold” rating while raising its price target from $125 to $145.

Sam Poser wrote in a note, “Nike remains one of the best companies anywhere, but the Nike stock still does not share that status. The FY25 revenue target of $65B appears reachable, but hitting $7 of EPS at that time may prove elusive. The use of data to drive global Consumer Direct digital & store revenue growth, and compelling product launches to do the same position Nike well to continue for some time to come. At the same time, despite management’s expectations for improved product flow in the coming quarters, and current lack of visibility in China, even with signs of improving demand, due to increased Covid-19 related lock downs, there is no reason for the NKE stock to trade at a premium to its 5-year FY2 average P/E multiple.”

»Citi Research maintained its “Neutral” rating at a $157 price target.

Paul Lejuez noted that the quarter’s earnings beat was driven mainly by lower SG&A expenses with gross margins below his estimate by 60 basis points. He wrote, “The company has navigated through the tough geopolitical climate fairly well, with mgmt maintaining F22E rev guidance of +MSD (as we expected). China was stronger than many feared and is expected to sequentially improve next qtr, while demand in NAM/EMEA is strong (despite supply constraints). While the brand is in great shape across most geographies, the Ukraine conflict, China’s response to new variants (which could impact demand and/or supply chain) make the F23 picture blurry (and we won’t hear mgmt’s thoughts on F23 until July). We believe the stock will trade higher on the better China #s in 3Q but F23 uncertainty will likely limit upside.”

Photo courtesy Nike