Nike earnings preview: Analyst concern shifts from supply chain to China

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Nike Inc. is scheduled to report fiscal second-quarter results on Monday after the closing bell, and while some analysts say the manufacturing shutdowns in Vietnam that hurt the company earlier this year are largely in the past, recovery in China has become a focus.

Nike
NKE,
-0.84%
announced a downward revision of its guidance during the last earnings announcement in light of the disruption in Vietnam, which began in July. Even with facilities back up and running, it would take time for production to reach capacity, the company said at the time.

“[W]e do not believe Nike will raise its FY22 guidance much,” wrote UBS analysts in a preview note.

“On one hand, Vietnam factories likely opened sooner than what Nike assumed in its guidance and favorable pricing trends suggest potential gross margin upside. On the other hand, a slow recovery in China, ongoing supply chain cost pressures, Omicron-related European lockdowns, and FX headwinds likely limit how much Nike can raise its guidance.”

UBS rates Nike stock a buy with a $185 price target.

See: Gap stock suffers biggest plunge on record as supply-chain disruptions expected to cost millions

Even with the Vietnam shutdowns accounted for, Baird analysts are preparing for some continued impact.

“We think downside risk tied to supply chain/logistics was captured in the September F2022E guidance cut especially with Vietnam successfully reopening (footwear exports +8% year-over-year 2Hof November) and global transit times not getting worse,” Jonathan Komp wrote.

“Still, we think supply chain becomes a greater drag than in FQ2, suggesting some risk Nike could point to FQ3 below consensus while reiterating the prior full-year outlook for revenue… and margin.”

Baird rates Nike stock at outperform with a $192 price target.

“Near-term, we think consensus China estimates are too ambitious,” wrote Stifel analysts led by Jim Duffy. Analysts there highlight property sector troubles, a falloff in consumer sentiment, and an ongoing backlash against Western brands among the hurdles Nike faces in the country.

“Big picture, our more conservative stance on FY22 does not change our above consensus view for FY23 but we are tempering FY23 estimates to reflect China uncertainty and recent strength in the U.S. dollar.”

Stifel rates Nike stock a buy but trimmed its price target to $202 from $213 in a note published Wednesday. Still analysts maintained an upbeat outlook for the company, thanks to its brand positioning, margin expansion, growing digital business, and other factors.

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Baird says there’s “moderate downside risk” in China and maintains the athletic giant has a leading position in a number of categories, like basketball and running, as well as other advantages that will drive gains.

“Given our expectation for a positive EPS inflection in FQ4/F2023E and Nike’s broader leadership positioning, we see opportunity for compounding multi-year returns near +20% even if the stock may lack near-term catalysts,” Baird said.

Nike has an average overweight stock rating and average price target of $183.25, according to 31 analysts polled by FactSet.

Here’s what else to look for when Nike reports on Monday:

Earnings: The FactSet consensus is for earnings per share of 63 cents, down from 78 cents last year.

The outlook for Estimize, which crowdsources estimates from sell-side and buy-side analysts, hedge-fund managers, executives, academics and others, is 74 cents.

Nike has beat the FactSet earnings consensus the last five quarters.

Sales: The FactSet sales consensus is for $11.250 billion, up from $11.243 billion last year.

The Estimize estimate is for $11.509 billion.

Nike missed the FactSet sales consensus in the last quarter.

Stock price: Nike stock is up 3.5% over the last three months, and has gained 14.4% for the year.

The Dow Jones Industrial Average
DJIA,
-1.48%
is up 16.1% in 2021.

And: The holiday season could still be a bright one despite disappointing November retail sales numbers

Other items:

-Nostalgia works for Nike. A StockX 2021 trend report highlights the importance of nostalgia for consumer companies, and Nike was a beneficiary. The site says the Jordan Air Force 1 was the top traded sneaker for the year.

“While some styles come-and-go… the Jordan sub-brand from Nike is the most consistently ‘hot’ brand in the sneakerhead community,” wrote Wedbush analysts in its inaugural monthly sneaker release report.

“More specifically, sneakerheads tend to gravitate to ‘retro’ releases of styles that Michael Jordan wore as a member of the Chicago Bulls.”

Analysts note the nine Jordan launches in November that sold out quickly. The sudden death of Off-White founder Virgil Abloh also drove soaring demand for shoes from the Nike/Off-White collaboration.

-Black Friday weekend was big for clothes and shoes. Cowen’s Holiday Digital Tracker shows apparel and shoes were hot items over the Black Friday holiday weekend, up 50% year-over-year. Nike was among the list of brands that also included On Holdings AG
ONON,
+0.22%,
Yeti Inc.
YETI,
+0.86%
and Lululemon Athletica Inc.
LULU,
-1.53%
that stood out for more full price sales or pricing that was in line with last year’s.

Also: Newly public On Holding is following in New Balance’s footsteps, in Baird’s view

Cowen rates Nike shares at outperform with a $189 price target.

“We believe direct-to-consumer expansion and Nike’s ‘manufacturing revolution’ could create a multi-year inflection in gross margin past prior peaks to reach ~$5.31 in EPS potential through FY25E,” analysts wrote.

The FactSet EPS consensus for fiscal 2022 is $3.57.

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