Shares of Nike (NKE) have fallen 11% over the past thirty days, including almost 18% in the past six months. The shares are down 23% year to date, compared to a 7% decline in the S&P 500 index. However, Nike’s underperformance doesn’t reflect the operational excellence the company has displayed over the past several quarters. Is this a buying opportunity?
The global apparel and footwear giant can remove all doubt when it reports third quarter fiscal 2022 earnings results after the closing bell Monday. Aside from inflation headwinds, some of the factors that has pressured the stock include supply chain issues; the company has struggled with inventory for the past several quarters. Meanwhile, the Russia-Ukraine conflict could add additional pressures to revenue. According to John Kernan, analysts at Cowen, Nike could suffer higher commodities prices which could also impact revenue in Europe for the just-ended quarter.
"Ocean freight rates are down from their record highs of mid-2021, but are still elevated and lapping much lower rates from a year ago... Current freight rates are in excess of $10k per container from Shanghai to Los Angeles, considerably higher than the $1,000 to $1,500 cost prior to the pandemic,” noted Kernan. With these challenges in mind, investors on Monday 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 February, Wall Street expects the Oregon-based apparel company to earn 71 cents per share on revenue of $10.6 billion. This compares to the year-ago quarter when earnings came to 90 cents per share on revenue of $10.36 billion. For the full year, ending in May, earnings are expected to be $3.66 per share, up from $3.56 a year ago, while full-year revenue of $46.94 billion would rise 5.4% year over year.
Nike's brand strength has been one of the company’s strongest assets, serving as a defense during periods of weak economic growth. The company continues to rely on that brand advantage, reinforcing it both through strategic marketing campaigns and sponsoring well-known athletes. The latter strategy has created strong demand for its products across the globe as consumers develop an increased focus on health and wellness as a result of the pandemic.
Most recently, the company’s investments in its Direct to Customer (DTC) and digital businesses have begun to expand Nike’s profit margins. One of the main factors of the DTC model is that it given Nike not only more pricing flexibility, it also allows the company to better control the consumer shopping experience, while offering customers more personalized products. Currently, the company’s DTC business accounts for about 35% of its Nike’s brand revenue, rising 12 percentage points from six years ago.
Because of its DTC success, Nike has reduced its North American wholesale accounts by roughly 50% since 2018. As a result, the company has produced a 46% gross profit margin in the first two quarters of this fiscal year. In the second quarter, the company beat on both the top and bottom lines, with revenue of $11.36 billion and EPS of 83 cents, which beat by 21 cents. Q2 gross margin increased 280 basis points to 45.9%, thanks to margin expansion in the Direct business driven by lower markdowns.
Direct revenue came to $4.7 billion, up 9% year over year, while Digital revenue rose 12% year over year. Nike continues to realize increased operating efficiency within its supply chain to maintain its growth profile and competitive edge. However, on Monday for the stock to reverse course, Nike must issue strong full-year guidance.
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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