Nike: Potential intact beyond short-term issues

Although the sales performance of Nike (“Wide Moat”) in the first quarter of fiscal 2023 (ending August) eclipsed our guidance, the disappointing near-term outlook related to US dollar strength and high inventory levels for the company and its North American peers weighed on investor sentiment .

While demand remains healthy, Nike has recently been struggling to manage product supplies due to shipping issues, leading to excess off-season inventory.

Quarter-end inventories were up 44%.

While discounts will weigh on margins in the second quarter, we believe the worst of Nike’s overstock problems are over.

Deliveries have normalized and sales appear to be strong.

The company has reported strong back-to-school demand and double-digit sales growth in September so far.

Attractive title

Nike’s share price fell about 9% after the release.

We expect only a single-digit percentage decline from our fair value estimate of $133 per share.

Based on the current price, the share looks attractive to us.

In the first quarter, Nike delivered double-digit currency-neutral sales growth in all regions except Greater China, which we take as evidence that its intangible brand remains intact as the origin of its broad competitive bulwark.

We expect a relatively quick recovery in activity.

Nike seems to have a strong lineup of new products and should be supported by the FIFA World Cup Qatar 2022 and other sporting events.

We continue to believe that the sportswear manufacturer can achieve gross and operating margins of 48% and 17%, respectively, within five years.

Earnings per share (EPS) for the first quarter were in line with our guidance of $0.93.

Gross margin of 44.3% beat our estimate by 110 basis points.

recreation in China

Revenue growth of 4% exceeded our 1% expectation despite an even stronger than expected dollar appreciation.

Additionally, the double-digit Q2 revenue growth forecast beats our estimate of 7%, although the gross margin rate could miss our 45.5% forecast by about 3 points due to fluctuations in inventory levels.

In the first quarter, Nike sales in Greater China declined 16% (13% at constant currency), beating our forecast of a 20% decline.

The company’s sales in the region have been impacted by local controversy and coronavirus-related closures in recent quarters, but we believe the group is poised to return to growth.

Longer term, we expect Nike’s annual sales growth in Greater China to stabilize at around 13% as the sportswear market expands and Chinese consumers embrace Nike’s brand and products.

© Morningstar, 2022 – The information contained herein is for informational and educational purposes ONLY. It is not intended and should not be construed as an invitation or solicitation to buy or sell any of the securities listed. Each comment represents the opinion of its author and should not be taken as a personal recommendation. The information in this document should not be the sole source for an investment decision. Be sure to consult a financial advisor or financial professional before making any investment decisions.

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