New data on Nike shows a mixed picture for the “Just Do It” brand’s outlook.
In a report published Wednesday by Bank of America Securities’ global research arm, analysts said that Nike is expected to guide 4 percent below consensus, with a fiscal 2024 earnings-per-share estimate of $3.80 representing 18 percent growth. According to analysts Lorraine Hutchinson and Chris Nardone, that expectation “seems well-appreciated by the investment community,” as economic headwinds and a “lack of visibility around the normalized sales trajectory in China” have had impacts on the stock.
Hutchinson and Nardone wrote that Nike management is now unlikely to guide above its algorithm of mid-to-high-teens growth because of the glut of inventory at wholesale retail and unpredictable consumer demand. The analysts said investors are likely expecting guidance between the $3.60-$3.80 range, rating the stock “neutral” as they believe the risks and rewards are balanced. On Wednesday, Nike stock traded at $109.54 per share, with a price target of $135.
The analysts said Nike’s growth trajectory in China is hard to gauge because of questions around normal sales in the country and macro conditions. Bank of America modeled Nike’s China currency growth at 15 percent for the fourth quarter, compared to a consensus of 14 percent—a potential “area of upside” for the company. They modeled sales growth at 11 percent for Q4—below the pre-Covid, four-year compound annual growth rate (CAGR) of 19 percent.
However, Nike and Jordan brand sales on popular Chinese online marketplaces Taobao and Tmall were up 68 percent year over year in May, compared to just 7 percent in both April and March. On the whole, sportswear industry sales grew 9 percent in May, 13 percent in April and 2 percent in March. For the full quarter, Nike sales grew 24 percent, 9 percentage points above the analysts’ estimate.
Macy’s and DSW have recently disclosed that they plan to add Nike during the fall season, signaling that the Beaverton, Ore.-based athleticwear titan is reversing its shift away from wholesale to direct-to-consumer. “We don’t think the strategy is broken,” Hutchinson and Nardone wrote, noting that the company will likely discuss the decision during its scheduled Jun. 29 earnings call. They don’t believe that the partnerships indicate “an about-face on its focus on reducing undifferentiated wholesale.”
Nike also continues to strengthen ties with Dick’s Sporting Goods. The company announced its participation in Dick’s “Sports Change Lives” initiative earlier this month. The largest campaign the partners have engaged in together, 10 Nike and Jordan brand athletes will contribute to the content.
Despite continued macroeconomic stressors, Nike could see some margin recovery next year. “Nike has lost 350 basis points of gross margin from higher transportation costs and markdowns,” the analysts wrote, adding that management will likely provide more details on the timing of margin recovery following this quarter’s results. Bank of America models gross margin growth of 200 basis points, which is 80 basis points above fiscal 2019 levels “thanks to pricing and a higher mix of full price sales.”
“Inventory was a key issue for Nike” during the first and second quarters of the year, “but clearance, sales to off price and refilling the wholesale channel allowed for significant progress,” with third-quarter growth of 15.6 percent. “We expect continued improvement in Q4,” they said, modeling 5 percent, and more headway in fiscal 2024.