Nike Inc. seems to be back in Wall Street’s good graces following a first-quarter earnings beat.
“Sentiment was overly negative into Q1,” TD Cowen’s John Kernan wrote in a research note, citing management “confidence” in what’s going on with gross margins, inventory and innovation. He has an “Outperform” rating on shares of the stock, with a 12-month price target of $120.
“Direct growth outpaced the broader business in Q1, which is expected to continue through Fiscal Year 2024,” he said. While promotions will be a gross margin tailwind, lower freight costs will also help. Nike CFO Matt Friend recently said the company has negotiated ocean freight rates that are “near pre-pandemic levels.”
Kernan said the company still needs to reach a high-teens EBIT (earnings before interest and taxes) margin for the brand to reach its long-term margin. The current margin is 12 percent for Fiscal Year 2024, but could reach 16 percent for Fiscal 2025 as China recovers.
Nike continues to win by cultivating digital connections with consumers, according to Kernan.
UBS softlines and retail analyst Jay Sole is also bullish on Nike.
“We continue to think Nike’s investments in product innovation, supply chain speed, and digital will unlock a multiyear period of above average growth,” Sole said. “Plus, we believe Nike has the brand strength, strategy, skills, resources and balance sheet to outperform peers through a recession. Nike’s [first quarter] earnings report gives us increased conviction in this view”
Should Nike hit its second quarter revenue targets, problems in China won’t matter as much. Nor will the share it’s losing in the running category or the high inventory it’s keeping around to stabilize top-line sales and build margins, he said. Nike leadership expects higher second quarter revenue than a year ago and doesn’t expect to go heavy on markdowns.
Sole said lower ocean freight costs, foreign exchange normalization, right-size inventory, lower raw materials costs and investments in areas such as regional service centers and e-commerce will help Nike reach a high-teens EBIT margin over the long term.
Sole has a “Buy” rating on the stock and a price target of $150.
With Nike’s stock price down 20 percent in the past three months, the company’s beat on expected profitability came from a higher gross margin driven by lower supply chain costs and lower SG&A (selling, general and administrative) expenses and a delay in some technology expenses, said Dana Telsey, CEO and chief research officer at Telsey Advisory Group.
The mid-single digit increase in Nike produce sellouts signals brand strength, company executives management told Wall Street during last month’s earnings call. Nike it growing market share across the basketball, football and lifestyle categories, just to mention a few. While everyday and road running lost share to surging brands such as Hoka and On, Telsey said Nike is focused on reinvigorating the product lineup next year.
“While sales have slowed against very tough year-over-year comparisons, we believe the Nike brand remains strong and the company’s profit headwinds are beginning to turn into a tailwind, which supports our view of Nike as a multi-year margin recovery story,” Telsey said. She also has an “Outperform” rating on the shares and a price target of $128.
According to an annual ranking by consultancy Brand Finance, Nike is once again the world’s most valuable apparel brand at $31.3 billion. That’s down 6 percent from the prior year, but ahead of Louis Vuitton at $26.3 billion, Chanel at $19.4 billion and Gucci at $17.8 billion. Rival Adidas was in fifth place, with a valuation of $15.7 billion.
Nike’s net profit in the quarter fell 1 percent to $1.45 billion, on a 2 percent revenue gain to $12.94 billion. Adjusted earnings per share of 94 cents easily beat FactSet estimates of 76 cents for the quarter.
The first quarter “offered proof of what Nike can deliver when we connect great innovation, great storytelling and great marketplace experiences to consumers,” said Nike president and CEO John Donahoe, in a statement. “Moving forward, we are laser-focused on scaling these successes with greater consistency and speed as we continue to integrate and streamline our business. This is how we’ll extend our leadership position and drive growth over the long-term.”
Nike said direct revenues were up 6 percent to $5.4 billion, while wholesale revenues were flat at $7 billion. And while the North American malaise saw sales in the region fall 1 percent, sales grew 12 percent in Greater China.
Nike ran into inventory trouble last year but it seems to be making progress on that front. It ended the first quarter with inventories down 10 percent to $8.7 billion.