Wedbush upgraded Nike to “Outperform” from “Neutral” due to its expectation that margins should start improving by its spring (May 2018) quarter and greater confidence in a return to growth in North America in its fiscal year ended May 31, 2019.
Christopher Svezia, the analyst, said he’s increasingly confident the pricing pressure on Nike footwear is subsiding as comparisons begin to ease, particularly around key categories like basketball. Moreover, “more tangible product drivers” around casual and lifestyle offerings are expected to arrive that clicks better with consumers.
“The cadence of new footwear styles are notably higher vs a year ago and the pipeline embraces more retro and casual silhouettes (Air 270, Shox Gravity, Epic React) vs largely a single technical style LY (VaporMax),” Svezia wrote.
He added, “Our conversations with retailers also indicate that NKE has one of the biggest opportunities in 2018 to show improvement.”
While some distribution pressure will continue to impact Nike in North America, Svezia expects the brand will still be able to increase sales in the region in fiscal 2019, driven largely its DTC (direct-to-consumer) channel.
Wedbush expects margins to expand for the first time in 10 quarters for Nike’s fourth quarter ended May 31 and remain positive in fiscal 2019. The gains reflect higher average selling prices, increased DTC sales and FX benefits with some of that improvement due to improved product, SKU rationalization, its 2X initiatives, and changes in regional and channel mix.
Nike’s overall performance is still expected to be supported by healthy growth internationally. The note cited potential share gains in Western Europe, the benefits of key events such as the World Cup and “DTC momentum across most countries.” FX is also expected to be a positive contributor in fiscal 2019 after weighing on margins over the last three years.
Svezia said shares are trading generally in line with historical levels based on FY19 expectations but he feels they should be earning a higher multiple. He added, “While shares have held up well despite the fundamental challenges (reflecting limited downside), an inflection in growth potentially sooner than the Street anticipates, in addition to a sustained turn in G/M could, as we have seen historically, support a higher multiple.”
Wedbush’s price target on Nike was raised to $74 from $57. Its earnings estimate was increased to $2.24 from $2.22 for fiscal 2018 and to $2.67 from $2.53 for fiscal 2019. For FY20, Wedbush introduced an estimate of $3.05.
Photo courtesy Foot Locker
