There was not much Christmas cheer for Nike (NKE) investors. The athletic-gear giant’s latest quarterly results failed to impress Wall Street with the shares crashing by 12% in the following session.
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In F2Q, revenue grew by 0.5% year-over-year (down -1.0% ex-FX) to $13.39 billion, in line with Street expectations. At the other end of the equation, EPS of $1.03 fared better than the consensus estimate by $0.18.
Those results appear respectable enough, but ultimately, it was the outlook that triggered such a negative response.
FQ3 revenue is expected to come in a touch on the negative side on a YoY basis with FQ4 revenue up by only low single-digits, both below Street expectations with some supply chain snags and macro headwinds, especially in China and EMEA, cited as the causes for the bleak forecast. For the full-year, Nike now anticipates revenue will increase by around 1%, vs. the prior forecast of a mid-single digit uptick.
Along with the lowered sales forecast, the company said that over the next three years, it plans to cut costs by about $2 billion.
While investors’ reaction was resolutely downbeat, for Goldman Sachs’ analyst Brooke Roach there were positives to note. Margins came in better than anticipated (+170bps compared to the guide of +100bps), while the analyst is also encouraged by NKE’s solid results during the early holiday season, as management highlighted nearly 10% growth and robust results during major holiday moments (Black Friday/Singles Day/etc).
“On the other hand,” admits Roach, “the update provided ample fodder for bears, with slowing growth momentum as a result of a tougher macro (particularly in Greater China and EMEA), NKE pointing to a more promotional competitive marketplace, and the company now speaking more comprehensively to key franchise life cycle management which will weigh on sales momentum going forward. Net, these headwinds are likely to drive many investors to look for NKE to deliver on innovation-led growth before assigning a more premium multiple to the stock going forward.”
The upshot of the above is a lower price target from Roach, which falls from $139 to $135. Still, following the sharp drop, there’s potential upside of 25% from current levels. Additionally, as Roach sees “scope for transitory cost recapture, a strengthening marketplace inventory backdrop, and innovation reacceleration to drive stronger earnings growth ahead,” the analyst’s Buy rating remains intact. (To watch Roach’s track record, click here)
Elsewhere on the Street, the stock claims an additional 19 Buys, 10 Holds and 1 Sell, all for a Moderate Buy consensus rating. Going by the $123.82 average target, a year from now, shares will deliver returns of 14.5%. (See Nike stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
