Shares of Nike (NKE) have fallen 5.5% over the past thirty days, including almost 4% in the past five days. While the shares are up 15% year to date, they trail the 24% rise in the S&P 500 index. However, Nike’s relative underperformance doesn’t reflect the operational excellence the company has displayed over the past several quarters.
While there is no doubt that the company has executed with great precision throughout the pandemic, leveraging its Direct to Customer strategy to beat its competitors, the stock valuation has been a major hurdle for many investors. But is now a good time to buy? There’s an opportunity here for patient investors to profit, given the company’s strong fundamentals. The global apparel and footwear giant can remove all doubt when it reports second quarter fiscal 2022 earnings results after the closing bell Tuesday.
Some of the factors that have pressured the stock include supply chain issues, but that shouldn’t prevent the stock from being bought, according to analyst Beth Reed at Truist. In a recent note to investors, Nike was listed as one of five retail stocks that should emerge stronger coming out of the pandemic. Reed cited the company’s strong margin potential due to its opening profile such as lower inventories which will drive fewer promotions and increase e-commerce adoption.
Nike continues to enjoy strong demand for its products across the globe as consumers develop an increased focus on health and wellness as a result of the pandemic. After being hard hit by the pandemic, the company posted revenue surge of 141% in 4Q in the North American market. And citing "back-to-school" demand and "return to sport,” the company reported a 15% rise in Q1 in North America. Known for its innovation, investors on Tuesday will look to see whether the athletic apparel giant can continue to assert itself as one of the better-performing names within the retail sector.
For the quarter that ended November, Wall Street expects the Oregon-based apparel company to earn 63 cents per share on revenue of $11.25 billion. This compares to the year-ago quarter when earnings came to 78 cents per share on revenue of $11.24 billion. For the full year, May, earnings are expected to be $3.59 per share, up from $3.56 a year ago, while full-year revenue of $47.09 billion would rise 5.7% year over year.
The projected 5.7% expected rise in fiscal-year profits doesn't paint accurately reflect the strength in Nike’s pricing power. Nor does it highlight the improvements in the company’s digital transformation, where it leverages a suite of digital apps to engage with customers. This has been not only a strong revenue driver for the company, but also a boost to profit margins. Nike has also begun to realize increased operating efficiency within its supply chain to maintain its growth profile and competitive edge.
In the first quarter, Nike beat strongly on the bottom line, logging its tenth consecutive beat, thanks to consistent e-commerce improvement. Digital sales were up 25%, driven by a 43% increase in North America. Q1 gross margin expanded 170 basis points year over year, with 70 basis points improvement sequentially. However, the stock was punished because revenue missed by $220 million, despite the 16% rise year over year.
On Tuesday for the stock to reverse course, management must issue strong revenue forecasts for the full year, suggesting the company is well-positioned to capitalize on the reopening of the U.S. economy as well as gross margin expansion for fiscal 2022.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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