Is it now time to chase Nike (NKE) stock? Shares of the athletic apparel giant have fallen 20% since the company reported earnings in March. The stock has fallen 34% year to date and 17% over the past year, trailing the S&P 500 in both spans. But there’s reason to expect a rebound.
The global apparel and footwear giant can remove all doubt when it reports fourth quarter fiscal 2022 earnings results after the closing bell Monday. Nike’s underperformance doesn’t reflect the operational excellence the company has displayed over the past several quarters. The stock has fallen even though the company produced encouraging results, overcoming not only rising inflation but also supply chain headwinds to surpass Street estimates, while growing its margins.
The Federal Reserve, however, has since raised interest rates multiple times, igniting market fears of a recession. The company has struggled with inventory, sparking fears from some analysts that the company could suffer higher commodities prices in the near term which could impact revenue in regions like Europe and China. The latter, which is the company second-largest market, is expected to suffer from soft demand due to pandemic-related lockdowns. Last quarter, Nike’s China business improved from a revenue decline of 24% to a much narrower 8% decline.
Still, 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. With all of these moving parts to consider, investors on Monday will look to see whether the company can continue to assert itself as one of the better-performing names within the retail sector.
For the quarter that ended May, Wall Street expects the Oregon-based apparel company to earn 81 cents per share on revenue of $12.07 billion. This compares to the year-ago quarter when earnings came to 93 cents per share on revenue of $12.34 billion. For the full year, earnings are expected to be $3.71 per share, up from $3.56 a year ago, while full-year revenue of $46.62 billion would rise 4.7% year-over-year.
The expected decline in both revenue and profits for the just-ended quarter reflects the tough year-over-year comparisons the company is working through and has part of the recent decline in the share price. This quarter, the company’s performance in China will weigh heavily on its results. Analysts at both Barclays and Morgan Stanley last week forecasted weak revenue in the region. Investments in its Direct to Customer (DTC) have begun to expand profit margins.
The management noted that digital revenue as a key driver to support a "high teens operating profit over the multiyear period.” One of the main factors of the DTC model is that it gives Nike not only more pricing flexibility, but also allows the company to better control the consumer shopping experience, while offering customers more personalized products. In Q3, the company beat both the top and bottom lines, with revenue of $10.9 billion and EPS of 87 cents, which beat by 21 cents.
Q3 gross margin increased 100 basis points to 46.6%, thanks to margin expansion in the Direct business driven by lower markdowns. The company’s digital revenue grew more 22%, while Nike branded digital revenue increased 19%, thanks to a 33% rise in North America. Currently, the DTC revenue is $4.6 billion, up 15% year-over-year, accounting for about 35% of its Nike’s brand revenue. On Monday for the stock to reverse course, Nike must produce another beat and 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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