Nike Earnings Preview: Shift in Demand and Foot Locker Removal Could Hurt Earnings

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Nike Inc. is watching the heels, according to Seaport Research Partners, which downgraded the athletics giant to buy neutral ahead of fiscal fourth-quarter results, which are expected to be announced on June 27.

“We do not believe an above-normal valuation is currently warranted for three main reasons,” Mitch Kummetz, principal analyst at Seaport, wrote in a note released Wednesday.

“First, we believe consumer demand has shifted from athletic to non-athletic, which is a less than optimal backdrop for Nike. Second, we believe demand has declined for some of Nike’s major franchises, which which could weigh on the performance of some of its larger categories.”

The last reason is related to the company’s NKE,
+0.98%
decision to focus on direct-to-consumer (DTC) sales, pulling out of many chains, including DSW, a Designer Brands Inc. DBI,
-1.30%
chain, and Foot Locker FL,
-0.93%.

“Third, while we believe Nike’s wholesale distribution streamlining has its merits, it leaves a void at some retailers, namely Foot Locker, which could provide some of Nike’s competitors with a platform to gain traction. relevance and gain market share.”

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BTIG says they are seeing signs of falling demand in North America, adding to the problems in China from COVID-related lockdowns and supply chain disruptions.

“By category, we believe apparel and footwear have slowed, potentially signaling consumer fatigue online after last year’s consumer stimulus-induced shopping frenzy,” the analysts led by Camilo Lyon wrote.

“That said, it’s not all disastrous, as retailers who have been starving for inventory are getting it and seem to be selling it. Given Nike’s strong push to accelerate its DTC mix, the slowdown in direct sales in a potential recession does not bode well for the F23 outlook, in our view.

BTIG rates Nike stock neutral.

Nike has an average overweight rating, according to 31 analysts polled by FactSet. Nike has an average target price of $151.36.

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Here are some other things to look out for when Nike announces its results:

Earnings: The FactSet consensus calls for earnings per share of 81 cents, down from 93 cents last year.

Nike has beaten the FactSet consensus for the past seven quarters.

Estimize, which collects estimates from long and long analysts, hedge fund managers, executives, academics and others, forecast EPS of 90 cents.

Sales: The FactSet consensus projects sales of $12.070 billion, up from $12.344 billion last year.

Nike has beaten the FactSet sales consensus for the past two quarters.

Estimize’s outlook forecasts sales of $12.228 billion.

Stock price: Nike stock is down 37% since the start of the year. The benchmark Dow Jones Industrial Average is down 16.1%.

Other items:

– Not all analyst groups are negative. Wedbush, for example, thinks the stock pullback is a buying opportunity given factors such as the upcoming World Cup and comparisons to facility closures in Vietnam last year.

Wedbush rates Nike shares to outperform with a price target of $139.

And Baird maintained his outperform rating, but lowered his price target from $165 to $150.

“Although it is still very early to comment, several global brands [that] attended Baird’s CTS Global Conference in early June and noted positive signs initially after Shanghai reopened, with Crocs, On Holding and Skechers (not covered) reporting somewhat better than expected results so far present (even though traffic still remains lower),” Baird said.

Credit Suisse maintained its outperform rating and lowered its price target to $130 from $165.

“Nike’s global trends were likely worse than expected in the fourth quarter due to much tighter lockdowns in China than the company implied in its guidance,” Credit Suisse wrote.

“That said, while our audits show that the global supply chain remains very challenging, consumer demand for the brand remains very strong, and we believe Nike has made more of an effort to get inventory to end markets. in the United States and Europe in order to compensate for the transient transitions in China’s sluggish trends during the quarter.

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-Nike is better able to handle a possible recession. Bank of America and Wedbush both point to Nike’s performance during the last recession. Bank of America economists say there is a 40% chance of a recession.

“To be clear, we view this magnitude of multiple compression as extremely unlikely given Nike’s relative fundamental outperformance over the past two recessions and transformation since 2008,” the Bank of America analysts wrote.

“Over the past five years, Nike has become more innovative, grown more consistently than its peers, and its direct-to-consumer move has improved margins and inventory visibility.

Bank of America rates Nike stock neutral with a price target of $122.

Wedbush points out that “Nike’s stock decline from peak to trough during the ‘Great Recession’ [of 2007 to 2009] was the best of all companies” in the cover of the group.

-A new law to combat forced labor could be a problem for clothing and footwear companies. Cowen analysts note the June 21 enactment of the Uyghur Forced Labor Prevention Act (UFLPA), which U.S. Customs and Border Protection says prohibits items imported from the Republic’s Xinjiang Uyghur Autonomous Region. popular in China or produced by certain entities. Cowen notes that about 19% of world cotton production is in this zone.

“There must be clear and convincing evidence that the goods, merchandise, articles or commodities were not produced by forced labor,” Cowen wrote.

“Enforcement should be systemic – if it meets the criteria (which have not been made public), goods will be held at port, making it difficult for the garment and footwear industry to navigate a chain already highly disruptive sourcing environment and where Chinese consumer sentiment for Western brands has been less favorable over the past 12 months.”

Cowen believes Nike stock is outperforming with a price target of $133.

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