Shares of Nike (NKE) have fallen 6.5% over the past six months, including 5.3% in thirty days. 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's valuation has been a major hurdle for many investors.
The global apparel and footwear giant can remove all doubt when it reports fourth quarter fiscal 2021 earnings results after the closing bell Thursday. With shares down 9% year to date, trailing the 11% rise in the S&P 500 index, there’s an opportunity here for patient investors to profit, given the company’s strong fundamentals. Nike is still enjoying strong demand for its products across the globe as consumers develop an increased focus on health and wellness as a result of the pandemic.
What's more, Nike's digital transformation, where it leverages a suite of digital apps, has been a strong revenue driver for the company. The company’s improving efficiency within its supply chain, combined with efforts to use real-time consumer insights to create product updates for its popular products (process called Nike Express Lane) underscores the level of innovation that still exists at the company. In other words, the recent rout in the Dow stocks, driven by interest rate concerns, has affected Nike’s value, which lost almost 3% last week alone.
Not all of Wall Street is in agreement with the bullish thesis, however. On Tuesday Camilo Lyon, analyst at BTIG Securities, trimmed his price target on Nike to $153 from $161. Citing expectations for merely an in-line earnings report, Lyon also noted softening demand in China and weaker orders for future quarters. Lyon sees Nike ’s long-term EPS growth target guidance to be in mid-teens, which he puts FY22 guidance at roughly $3.60 per share which is about 30 cents below consensus.
"We believe NKE can ultimately flex its marketing and innovation muscles to overcome these hurdles and further distance itself from the competition, we could see near term sales volatility in Greater China, the brunt of which is likely to be felt in the next 1-2 quarters,” Lyon noted. In other words, Nike has a lot to prove on Thursday. The management will need to demonstrate confidence with strong revenue forecasts for next quarter and full year to suggest it is strongly positioned not only in China, but also to capitalize on the reopening of the U.S. economy.
For the quarter that ended May, Wall Street expects the Oregon-based apparel company to earn 51 cents per share on revenue of $11.05 billion. This compares to the year-ago quarter when the company lost 51 cents per share on revenue of $6.31 billion. For the full year, earnings are expected to rise 94% year over year to $3.14 per share, while full-year revenue of $43.3 billion would rise 15.8% year over year.
Despite increased competition, Nike has delivered consistent growth over the past year. In the third quarter, Nike beat strongly on the bottom line, logging its eleventh beat in the past thirteen quarters, driven by e-commerce gains. Although the 11% revenue decline in North America lead to a top-line miss, the company’s direct to consumer business which rose 15% offset that decline. What’s more, the fact that gross margin increased 130 basis points to 45.6%, along with 7% decline in selling & administrative expense shows the level of efficiency that drove the profit beat.
But for the stock to keep rising, the company’s guidance on Thursday must also reflect not only strong growth trends and gross margin expansion for fiscal 2022, but also revived growth in North America and China.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.