Nike Stock (NYSE:NKE) tanked by nearly 12% last Friday after it posted what appears to be its worst Fiscal Q2 report in 14 years. Revenue growth fell to its lowest rate since the Great Financial Crisis, with Nike’s Converse Brand reporting softer sales and weak wholesale gains. Management also hinted toward heavier headwinds during the company’s second half of the fiscal year. That said, Nike faced tough comps from last year, while its quarterly report had some noteworthy highlights. Consequently, I am neutral on the stock.
How Ugly Were Nike’s Q2 Results?
Given the double-digit plunge after posting its Q2 results, one can rush to assume that Nike’s report was pretty ugly. After all, revenue growth for the three months ending on November 30th came in at just 0.55%, marking the worst second-quarter revenue growth for the company since 2009. However, some context is needed. Otherwise, we would be unfair.
Specifically, we can’t ignore that what appears to be underwhelming revenue growth is due to a tough comparison versus last year’s explosive revenue growth of 17%, or 27%, on a constant currency basis. Due to last year’s abnormal growth, it makes sense to expect revenue growth to normalize. This cyclicality is normal in Nike’s revenues. For example, last year’s exceptional growth (Q2 2023) also came after revenue growth of just 1% in the year before (Q2 2022).
In the meantime, there were several noteworthy highlights in Nike’s report. For starters, NIKE Digital had its strongest Black Friday week ever, as management emphasized that a record number of consumers shopped in the company’s stores over the long Thanksgiving weekend. In Greater China, brick-and-mortar sales grew by double-digits during the National Day holiday, also performing well.
These holiday results, when considering that this quarter was against last year’s tough comps and that Nike’s inventory was healthy, showcase the strength of the Nike Brand in what has become a brutally competitive industry during continuous macro volatility. Another highlight included the Jordan Brand’s apparel division surpassing the $1 billion annual revenue threshold, growing by 20% over the past year.
However, the most impressive part of the report was that Nike managed to expand its margins despite what appears to be a challenging environment. The company’s gross margins expanded 170 basis points to 44.6% on a reported basis, powered by higher pricing, lower ocean freight rates, and improved supply-chain efficiency.
Further, with Nike having very little debt on its balance sheet, rising rates didn’t really impact its bottom line either. Hence, the company was able to post a net margin of 11.8%, up from 10% in the prior year period, further fueling net income growth. Combined with the effect of share repurchases, EPS grew by a significant 21% to $1.03 compared to Q2 2023. In my view, this is a very impressive result – certainly for what has been characterized as a bad quarter.
Nike’s Soft Guidance & Hefty Valuation Still Signal Headwinds
While Nike’s second-quarter report was certainly not as bad as the market seems to think, management warned about certain headwinds the company is about to face during the second half of this fiscal year. I believe these headwinds, coupled with the fact that Nike shares are still trading at a premium, may signal downside potential for the stock.
In particular, Nike is negatively affected by a stronger U.S. dollar and a somewhat weak wholesale order book in its second half of the year. Management also noted heavier macro headwinds, particularly in Greater China and EMEA, a needed revision in Nike’s digital growth plans based on current digital traffic softness, and higher (more expensive) marketplace promotions.
Based on these challenges, management expects that Q3 revenue growth will be slightly negative. In contrast, Q4 revenue growth is anticipated to increase by low-single digits. Given this slowdown and the fact that Nike shares continue to trade a hefty 30 times this year’s expected earnings, investors should not exclude the possibility of further downside potential.
What is the Price Target for Nike Stock?
Turning to Wall Street, Nike stock features a Moderate Buy rating based on 20 Buys,10 Holds, and one Sell assigned in the past three months. The average Nike price target of $123.86 implies 14.3% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell NKE stock, the most profitable analyst covering the stock (on a one-year timeframe) is Brian Nagel from Oppenheimer, with an average return of 22.04% per rating and a 70% success rate.
Conclusion: Nike Showcased Resilience, but Headwinds May Lead to Volatility
Despite facing tough year-over-year comps, Nike showcased resilience amid a competitive landscape. Impressive highlights, including strong digital performance, robust margins, and notable brand achievements, present a contrasting picture of the market’s overreaction. However, soft guidance, macro headwinds, and a premium valuation suggest that shares may keep facing volatility from here. With uncertainties looming, cautious optimism is warranted, leading me to maintain a neutral stance on Nike stock.
