Nike earnings preview: Shift in demand and a pullback from Foot Locker could hurt results

Nike Inc. is looking down, according to Seaport Research Partners, which downgraded the athletic giant to neutral since the purchase toward fourth-quarter tax gains, which will be announced on June 27th.

“We do not believe that a higher-than-normal premium valuation is currently justified for three main reasons,” Seaport senior analyst Mitch Kummetz wrote in a note released Wednesday.

“Firstly, we believe that consumer demand has shifted from sport to non-sport, which is a less than optimal backdrop for Nike. Secondly, we believe that demand has been reduced for some of the Nike’s key franchises, which could affect the performance of some of its larger categories. “

The final reason has to do with the company’s NKE,
+ 2.32%
decision to focus on direct sales to the consumer (DTC), withdrawing from many chains, including DSW, a DBI of Designer Brands Inc.
chain and Foot Locker FL,
+ 0.26%.

“Thirdly, while we believe that streamlining Nike’s wholesale distribution has its merits, it is leaving a gap with some retailers, such as Foot Locker, which could offer some of Nike’s competitors a platform for gain relevance and gain market share “.

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BTIG says they are seeing signs of declining demand in North America, adding to the problems experienced in China due to COVID-related blockages and supply chain disruptions.

“By category, we believe both clothing and footwear have slowed, which may indicate online consumer fatigue after stimulus-driven consumer shopping last year,” wrote analysts led by Camilo Lyon.

“That being said, not everything is serious, as retailers who have been hungry for inventory are getting it and are apparently selling it. Given Nike’s strong push to accelerate its DTC combination, the slowdown in direct sales to to a possible recession is not a good omen for the prospects of F23, in our opinion.

BTIG values ​​neutral Nike stocks.

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

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Here are a few more things to keep in mind when Nike announces its earnings:

Earnings: FactSet’s consensus is for 81-cent earnings per share, down from 93 cents last year.

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

Estimize, which collects estimates from sales and buying analysts, hedge fund managers, executives, academics and others, provides a 90-cent EPS.

Sales: FactSet’s consensus is for $ 12.07 billion in sales, down from $ 12.344 billion last year.

Nike has outperformed FactSet sales consensus over the past two quarters.

Estimize’s outlook is for $ 12.228 billion in sales.

Price of shares: Shares of Nike have dropped 37% to date. The benchmark Dow Jones Industrial Average is down 16.1%.

Other articles:

-Not all analyst groups are negative. Wedbush, for example, believes the withdrawal of shares is a buying opportunity when factors such as the upcoming World Cup event and comparisons with last year’s Vietnam facility closures are taken into account. .

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

And Baird kept its rating higher, but lowered its target price to $ 150 from $ 165.

“Although it is still too early to comment, several global brands [that] attended the Baird CTS Global Conference in early June, initially showing positive signs after the reopening of Shanghai, with Crocs, On Holding and Skechers (uncovered) signaling slightly better results than expected so far ( although traffic is still lower) “, Baird said.

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

“Nike’s overall trends were probably worse than expected on FQ4 due to China’s much tougher blockades than the company implied in its guidance,” Credit Suisse wrote.

“That said, while our controls show that the global supply chain is still very tough, consumer demand for the brand is still very strong, and we believe Nike has put more effort into taking inventory to end markets. of the United States and Europe to help offset the transition.

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-Nike is better able to deal with a possible recession. Bank of America and Wedbush highlight Nike’s performance during the most recent recession. Bank of America economists say there is a 40% chance of a recession.

“To be clear, we consider this magnitude of multiple compression to be extremely unlikely given Nike’s relative core performance over the last two recessions and the transformation since 2008,” Bank of America analysts wrote.

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

Bank of America considers Nike’s shares neutral with a $ 122 price target.

Wedbush points out that “Nike’s stock falls during the ‘Great Recession’ [of 2007 to 2009] was the best of any company ”in the coverage of the group.

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

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

“The application is expected to be systemic: if it meets the criteria (which have not been made public), the goods will be stopped at the port, making it difficult for the clothing and footwear industry to navigate. in a supply chain that is already very disruptive, and where sentiment among Chinese consumers for Western brands has been less favorable over the past 12 months. “

Cowen values ​​that Nike shares exceed with a target price of $ 133.

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