Nike Earnings Preview: Why Analysts Cut Earnings Forecasts

Nike Inc. is expected to report first-quarter results after the market close on Thursday, with Wall Street examining an ever-growing list of issues to work with the sports equipment maker.

A stronger dollar, inflation, Nike’s NKE,
cultural relevance amidst competition, the impact of China’s COVID-19 lockdowns and the state of Nike’s supply chain are some of them.

See also: The dollar crushes competing currencies. Here’s the thing.

As the US economy fares relatively well, pushing the dollar higher against other currencies, some analysts are trimming their quarterly or full-year estimates for Nike.

Analysts at Credit Suisse said in a research note on Friday that they cut their first-quarter earnings estimates for Nike to 90 cents from 95 cents and their full-year estimates to $3.60 from $3.70 would.

The cuts are mainly due to the tougher exchange rate backdrop, the analysts said. But they also said the pressure on gross margins “was greater than Nike anticipated” thanks to steeper discounts to clear shoes and other gear that had been sitting on warehouse shelves for too long due to supply chain issues.

However, Nike’s supply chains have improved in recent weeks, the analysts said, citing unnamed “US contacts”. Unsold product is moving more steadily, and Nike appeared to be having a “solid” back-to-school season in the US, they said.

Here’s what you can expect:

Merits: Analysts polled by FactSet expect Nike to post adjusted earnings of 92 cents per share, which would be the company’s fourth straight quarter of earnings growth. This result would compare to $1.16 per share in the same period last year.

Revenue: Analysts polled by FactSet are expecting revenue of $12.28 billion, up from $12.2 billion a year ago.

Stock price: Nike shares are hovering around lows not seen since July 2020.

Year-to-date, Nike shares are down 45%. In comparison, the S&P 500 Index SPX,
has fallen by around 23% over the same period.

What else awaits you: Nike has tried over the years to rely less on outside retailers for sales and more on selling directly to consumers, through its own stores or online.

For now, those consumers still appear to be responsive, even as prices rise, some analysts say. Jefferies analysts, citing their own analysis of online data, noted that consumer interest in sneakers rose in August versus July, with Nike managing to hold onto market share, helped by the popularity of its Dunk sneaker line became.

Still, analysts lowered their price target for Nike to $130 from $155, up 34% from Friday’s prices. However, they maintained their buy rating on the stock and said they were bullish on the longer term.

“In our view, (Nike) appears to be winning the ‘sneaker war’ and we maintain our (long-term buy) view based on the company’s track record of innovation and maintaining cultural relevance,” said analysts at Jefferies.

However, they said the terrain was bumpier in the short term.

“We believe the consensus estimates have not fully addressed currency headwinds, inflationary pressures on the global consumer and pressures on gross margin as the advertising environment tightens,” the analysts said.

Analysts at B. of A. also cut their full-year earnings per share targets by a few cents on Friday, amid concerns about a strong dollar. They captioned their Friday note, “There’s More to Watch Than China.”

However, China is still a cause for concern for Nike investors. The company suffered a setback in China last year after raising concerns about reports of forced labor in the Xinjiang region. The area produces much of the world’s cotton supply and has been the target of allegations of human rights abuses from the West.

“The demand picture in China remains gloomy,” the analysts at B. of A. said in their statement. “The (cotton) boycotts and COVID lockdowns have dampened sales and created a stock glut across the sports channel. We expect (the first half of Nike’s fiscal year) to be characterized by heavy promotional activity to keep inventories at the right size.” Nike Earnings Preview: Why Analysts Cut Earnings Forecasts

Brian Lowry

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