Shares of Nike (NKE) have broadly underperformed the market, falling 5.6% year to date, compared to a 14% rise in the S&P 500 index. When expanding that horizon to one year and three years, Nike has risen just 5.28% and 11%, respectively, while S&P 500 index has returned 6% and 40%, respectively, in the same time span.
Investors want to know if it is time to chase Nike stock. The global athletic footwear giant is set to report fourth quarter fiscal 2023 earnings results after the closing bell Thursday. Aside from inflation headwinds which has impacted the company’s global operations, Nike has also navigated issues related to supply chains. And things won’t get better anytime soon, according to analysts at Morgan Stanley, who are advising caution on Nike’s upcoming forward guidance.
"Recent NA & Europe sportswear channel checks make it clear that demand for mass sportswear has potentially slowed, leaving a sizable inventory glut across the industry that is currently being promoted away,” the analysts noted. Still, citing a slight recovery in China as an offsetting factor for Nike, Morgan Stanley maintained an Overweight rating and a $130 price target on Nike stock. But in the near term, there’s still the fear of revenue and margin pressure which could cause a miss in Q4 profits.
Even then, the stock still looks relatively cheap, when compared to the company’s long-term potential, particularly with its Direct-to-Consumer (DTC) business, which has been a standout segment performer, becoming more profitable than Nike’s wholesale segment, while also giving Nike more pricing power. On Thursday the shares will react positively if the company can deliver a top and bottom line beat along with positive guidance.
For the quarter that ended May, Wall Street expects the Oregon-based apparel company to earn 67 cents per share on revenue of $12.59 billion. This compares to the year-ago quarter when earnings came to 90 cents per share on revenue of $12.23 billion. For the full year, earnings are expected to be $2.96 per share, down from $3.75 a year ago, while full-year revenue of $46.63 billion would decline about 0.2% year over year.
As it stands, DTC now accounts for 43% of the company’s total revenue, compared to just a little over 27% six years ago. In addition to the DTC business, Nike’s online distribution and its online channels has been an area where the company has invested heavily. There is an estimated 160 million active members in the company’s online membership and loyalty programs.
These collective initiatives has helped Nike stay well ahead of the competition in areas such as running, basketball, and the general footwear brand. 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 developed an increased focus on health and wellness as a result of the pandemic.
In terms of execution, in the third quarter, the company beat on both the top and bottom lines, with revenue rising 14% year over year to $12.39 billion and adjusted EPS of 79 cents, which beat by 24 cents. However, because of increased promotions, Q3 gross margin fell 330 basis points to 43.3% of sales, missing the 43.7% consensus. These were offset by improved Direct revenue which rose 17% year over year to $5.3 billion, while Digital revenue rose 12% year over year.
The company continues to make the best out of a bad situation. On Thursday the shares will react positively if the company can delivery a top and bottom line beat along with positive 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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