Nike will need to navigate a host of near-term risks, particularly in China, as it moves into the second half of a challenging year for the sports apparel giant.
Updated at 9:40 am EST
Nike (NKE) – Get NIKE, Inc. Class B Report shares moved higher Monday ahead of its third quarter earnings report, with investors focused on the impact of supply chain disruptions, China’s Covid surge and the fastest U.S. inflation rates in forty years on the the sports apparel giant’s full-year outlook.
China remains a lynchpin for Nike’s near-term growth, both in retail and supply chain terms, and its weakness in prior quarters has held down revenue gains for the group and tempered investor sentiment.
The recent Covid surge in China, which has triggered lockdowns in major industrial and financial hubs, its likely to both clip third quarter sales while adding to pressures on inventories that could hamper revenues in the United States.
Analysts are expecting Nike to post earnings of around 71 cents per share for the three months ending in January, a tally that would be down 21.1% from the same period last year, even as revenues are forecast to rise 2.2% to $10.6 billion when it reports after the close of trading Monday.
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Nike held to its fiscal 2022 forecast of mid-single-digit revenue growth compared to the prior year — with a 150 basis point gross margin improvement — when it reported stronger-than-expected second quarter earnings in December, with a similar forecast for the the three months ending in January.
“We think consensus models have not yet been properly revised to reflect the difficult macro outlook for the next 6 months despite significant new headwinds,” said Credit Suisse analyst Michael Binetti,” who carries an ‘overweight’ rating with a $160 price target on the stock. “And we expect any commentary on FY23 from Nike on (the earnings call) to push those models lower.”
“We think valuation relative to the peer group can start to expand again—and believe Nike is the best equipped name in our coverage to navigate the current macro challenges,” he added. “And it’s not often that we’ve seen entry points with the stock down (so far) YTD.”
Nike shares were marked 0.4% lower in early trading to change hands at $130.65 each, a move that would extend the stock’s year-to-date decline to around 20% with a market value of around $206.5 billion.
Nike is already paring back allocations to wholesales such as Foot Locker (FL) – Get Foot Locker, Inc. Report, as it pivots towards a direct-to-consumer and digital sales focus, and cautioned that “inventory supply has been a major disruption in the marketplace” during its December earnings call.
The fastest consumer price inflation in forty years may also hit Nike’s U.S. sales as customers pare back purchases and adjust to record-high gasoline prices.
U.S. retail sales growth slowed sharply last month, data from the Commerce Department indicated last week, suggesting fading sentiment and surging inflation pressures are starting to take their toll on consumer spending.
China sales, meanwhile, could fall between 10% and 15% amid the ongoing Covid disruption. Nike’s China sales, in fact, slumped 24% from last year to $1.844 billion over the three months ending in November.
CFO Matthew Friend said the decline was “overwhelmingly impacted by supply disruptions from Vietnam” but conceded that local measures put in place to stop the spread of Covid infections in the world’s second-largest economy were also a factor.
Nike’s European sales may also take a hit from the ongoing conflict in Ukraine, and the group’s decision to close all of its Russia-based stores following the launch of President Vladimir Putin’s “special operation” on February 24.
