Is Nike (NKE) a Buy or Hold Prior to Earnings?

Athletic footwear and apparel giant NIKE, Inc.’s (NKE) fiscal 2023 fourth-quarter revenue surpassed Wall Street’s estimates. However, its earnings fell short of expectations for the first time in three years, as the company reported lower margins that weighed on profits during the quarter.

NKE reported fourth-quarter revenue of $12.83 billion, up 5% year-over-year and ahead of analysts’ estimates of $12.58 billion. The company beat revenue estimates for the seventh consecutive quarter, as sales surged in China after the country rolled back its pandemic restrictions. Its full-year revenues were $51.20 billion, an increase of 10% compared to the prior year.

“FY23 demonstrated the power of NIKE’s portfolio to fuel strong growth, year after year. We finished the year with mid-teens currency-neutral revenue growth and a healthy marketplace — setting the foundation for sustainable, profitable growth in FY24 and beyond,” said Matthew Friend, NKE’s Executive Vice President and Chief Financial Officer.

However, NKE’s profits came in below expectations. The retailer posted earnings per share for the fourth quarter of $0.66, compared to $0.90 a year ago. Earnings came in below analysts’ expectations of $0.67, a rare miss for the company. For its full year, Nike’s net income was $5.10 billion, down 16% year-over-year.

The company, set to release its first-quarter fiscal 2024 results on Thursday, September 28, 2023, provided muted guidance for the quarter and year ahead as it watches the broader economy, consumer behavior, and retail trends.

For the first quarter of fiscal 2024, NKE forecasts revenue to be flat to up low single digits. Also, the company expects gross margins in the quarter to be down 0.5 to 0.75 percentage points. For the full-year 2024, it anticipates revenue to grow in mid-single digits, and its gross margins are expected to improve between 1.4 and 1.6 percentage points.

While NKE is among the top athletic footwear and apparel retailers, it is not immune to overall softness in the footwear and apparel industry due to elevated inflation and reduced spending trends on discretionary items.

Amid consumers’ pullback on discretionary spending, Nike and other retailers are forced to spend more on marketing and promotions to boost volume, which has pressured margins. NKE’s gross margins dropped by 1.4 percentage points during the fourth quarter to 43.6%, contributing to the earnings miss.

The retailer attributed the decline in gross margins to elevated product input costs, high freight and logistics expenses, promotions to clear excess inventory, and unfavorable currency exchange rates.

Further, the company has grappled with high inventory levels for the past several quarters, which have weighed on its margins. Inventory value was $8.5 billion at the end of the fourth quarter, which is almost flat compared to the prior year’s quarter. However, quarter-on-quarter, it offloaded around $400 million in inventories.

But still, inventories are running nearly 23% above levels witnessed in 2021, before supply chain disruptions that caused inventory woes across the industry, as per retail analyst Neil Sauders, the managing director of GlobalData.

Jefferies’s Randal Konik downgraded shares of NKE to Hold from Buy and lowered his price target to $100 from $140. The downgrade is attributed to various factors. The key factor is the challenging macroeconomic environment in China that could impact Nike’s performance.

This concern is compounded by an expected decline in consumer spending within the U.S., which could further affect the retailer’s bottom line.

Shares of NKE have slumped 8.4% over the past month and 23.1% over the past six months to close the last trading session at $90.60.

Let’s look at factors that could influence NKE’s performance in the upcoming months.

Mixed Financials

For the fourth quarter that ended May 31, 2023, NKE’s revenues increased 4.8% year-over-year to $12.83 billion. Its gross profit grew 1.7% from the year-ago value to $5.60 billion. However, the company’s net income was $1.03 billion, down 28.4% from the previous year’s quarter.

Furthermore, the company’s earnings per common share rose 26.7% year-over-year to $0.66. As of May 31, 2023, its cash and cash equivalents stood at $7.44 billion, compared to $8.57 billion as of May 31, 2022.

Robust Historical Growth

NKE’s revenue and EBITDA grew at CAGRs of 11.1% and 17% over the past three years, respectively. Over the same time frame, the company’s net income and EPS increased at 25.9% and 26.4% CAGRs, respectively.

Additionally, the company’s total assets grew at a CAGR of 6.2% over the same period, while its levered free cash flow increased at a CAGR of 21.2%.

Mixed Analyst Estimates

Analysts expect the company’s revenue for the fiscal 2024 first quarter (ended August 2023) to come in at $13.01 billion, indicating an increase of 2.5% year-over-year. However, the consensus EPS estimate of $0.76 for the to-be-reported quarter reflects an 18.2% year-over-year decline.

For the fiscal year ending May 2024, analysts expect NKE’s revenue and EPS to increase 4.4% and 14.1% from the previous year to $53.47 billion and $3.69, respectively. The company’s revenue and EPS for the fiscal year 2025 are expected to grow 7.8% and 17% year-over-year to $57.65 billion and $4.31, respectively.

Attractive Dividend

In August, NKE announced a quarterly cash dividend of $0.34 per share on its Class A and Class B common stock, scheduled for distribution to shareholders on October 2, 2023.

NKE’s annual dividend of $1.36 translates to a yield of 1.50% based on prevailing prices. Its four-year average dividend yield is 0.94%. The company’s dividend payments have grown at a CAGR of 11.5% over the past three years. Moreover, NKE has raised its dividend for ten consecutive years.

In fiscal 2023, the company returned nearly $7.50 billion to shareholders, including dividends of $2 billion, an increase of 10% from the previous year.

Elevated Valuation

In terms of forward non-GAAP P/E, NKE’s 28.05x is 127.8% higher than the 12.31x industry average. Its forward EV/Sales of 2.62x is 132.2% higher than the 1.13x industry average. Moreover, the stock’s forward EV/EBITDA of 18.43x is 98.4% higher than the 9.29x industry average.

Further, the stock’s forward Price/Sales and Price/Book multiples of 2.59 and 10.65 are significantly higher than the respective industry averages of 0.82 and 2.32. Its forward Price/Cash Flow of 20.51x is 159% higher than the industry average of 7.92x.

High Profitability

NKE’s trailing-12-month gross profit margin of 43.52% is 22.8% higher than the 35.45% industry average. Its trailing-12-month EBITDA margin of 13.23% is 20.1% higher than the 11.01% industry average. Likewise, the stock’s trailing-12-month net income margin of 9.90% is 124.2% higher than the industry average of 4.42%.

Additionally, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 34.63%, 23.68%, and 13.51% compare favorably to the industry averages of 11.39%, 6.11%, and 3.89%, respectively.

POWR Ratings Show Uncertainty

NKE’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to Neutral in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NKE has a B grade for Quality, in sync with its higher profitability relative to its peers.

Also, the stock has a C grade for Sentiment, consistent with its mixed analyst expectations. On the other hand, NKE has a D grade for Value, justified by its higher-than-industry valuation.

NKE is ranked #18 of 37 stocks in the Athletics & Recreation industry.

Beyond what I have stated above, we have also given NKE grades for Momentum, Growth, and Stability. Get access to all the NKE ratings here.

Bottom Line

NKE’s fourth-quarter revenue beat analysts’ estimates, but the company missed on earnings for the first time in three years. While the prominent activewear retailer is poised for long-term growth, given strength across its portfolio of brands and market dominance, its near-term outlook appears bearish.

Concerns over China’s sluggish consumer recovery, intensifying merchandise inventories, and dampened consumer spending on discretionary items across the U.S. would weigh on Nike’s profitability in the near term.

Given NKE’s lower margins, elevated valuation, and bleak near-term prospects, it could be wise to wait for a better entry point in this athletic stock before its upcoming earnings release.

Stocks to Consider Instead of Nike, Inc. (NKE)

Given its uncertain short-term prospects, the odds of NKE outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Athletics & Recreation industry instead:

American Outdoor Brands, Inc. (AOUT)

Skechers U.S.A., Inc. (SKX)

Vista Outdoor Inc. (VSTO)

For exploring more A and B-rated athletic stocks, click here.

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NKE shares fell $0.30 (-0.33%) in premarket trading Tuesday. Year-to-date, NKE has declined -22.09%, versus a 13.60% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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