Is it a good time to buy Nike shares?

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Nikeit is (NKE -2.24%) the stock fell 13% on September 30 in response to its latest earnings report. In the first quarter of fiscal 2023, which ended August 31, the athletic footwear and apparel giant’s revenue grew 4% year-over-year (10% in constant currencies) to reach $12.7 billion, beating analysts’ estimates of $140 million. Its net profit fell 22% to $1.5 billion, or $0.93 a share, but still beat consensus forecasts by a penny.

Those numbers seemed stable, but Nike’s falling margins, rising inventories and bleak forecasts spooked investors. Does this selloff represent a good long-term buying opportunity for investors who can shrug off short-term noise?

Image source: Nike.

Nike sales continue to rise

Nike’s business has remained resilient in previous downturns. In fiscal 2020, which ended May 30 of the calendar year, its revenue declined slightly as it grappled with the initial impact of the COVID-19 pandemic. But its growth accelerated again in fiscal year 2021 as those headwinds subsided, and its business continued to stabilize through fiscal year 2022.

The robust growth of Nike Direct, its direct-to-consumer channel that hosts its e-commerce platform and physical stores, has enabled it to recover quickly while reducing its overall reliance on third-party retailers. Nike Direct continued to grow in the first quarter of fiscal 2023, and its weight on Nike’s top line has steadily increased over the past few years.

Period

Q1 2023

FISCAL YEAR 2022

FISCAL YEAR 2021

FISCAL YEAR 2020

Nike Direct Revenue Growth (YOY)

14%

15%

30%

8%

Percentage of total Nike revenue

40%

40%

39%

33%

Nike Total Revenue Growth (YOY)

ten%

6%

17%

(2%)

Data source: Nike. Constant exchange basis. YOY = year after year.

Over the past year, Nike Direct’s global growth has also offset its declining sales in China, which had been disrupted by COVID-related shutdowns. This balancing act continued in the first quarter, as Nike’s 13% year-over-year decline in constant currency revenue in the Greater China region was offset by its growth in North America, Europe and the rest of the world. other regions.

Nike expects revenue to grow by “low double digits” in constant currencies for the full year, implying that its growth will actually accelerate from fiscal 2022. expects its reported earnings, which will be strangled by a strong dollar and other currency headwinds, to grow in the “low to mid-single digits” from its 5% growth during the year. financial year 2022.

Watch out for rising inventory and falling margins

Nike’s revenue growth appears steady, but the company rattled investors with a 44% year-over-year increase in inventory in the first quarter as its gross margin shrunk 220 points base at 44.3%.

Period

Q1 2023

FISCAL YEAR 2022

FISCAL YEAR 2021

FISCAL YEAR 2020

Inventory Growth (YOY)

44%

23%

(seven%)

31%

Gross margin

44.3%

46%

44.8%

43.4%

Data source: Nike. YOY = year after year.

Nike attributed its growing inventory to volatile North American transit times as well as an intentional decision to stockpile inventory for future seasons earlier than expected. It was further inflated by tough comparisons with its factory closures in Vietnam and Indonesia last year, which had temporarily reduced inventory.

As for its declining gross margins, Nike blamed higher freight and logistics costs, higher markdowns in North America and unfavorable exchange rates. The first two challenges relate to inflation, which is driving up gas prices and dampening discretionary buying, while the last won’t subside as long as rising interest rates support dollar strength.

Nike doesn’t expect all three of these headwinds to dissipate any time soon. It expects its gross margin to decline 350-400 basis points year-over-year in the third quarter as it aggressively liquidates excess inventory, and its gross margin to decline 200-250 basis points base for the whole year.

Nike’s earnings could not support its valuations

Nike’s earnings report was not dire, but its stock was richly valued ahead of its post-earnings plunge. Analysts currently expect Nike’s revenue to rise 7% this year while its profits fall 2%. But at $100 a share, Nike shares were already valued at 27 times this year’s earnings. By comparison, Nike’s rival lululemon (NASDAQ: LULU) – which is expected to increase both revenue and earnings by around 27% this year – trades at 31 times forward earnings.

So when it became clear that Nike wasn’t growing as fast as Lululemon or other faster-growing retailers, its stock plummeted. But at $80, Nike shares still can’t be considered a bargain at 22 times forward earnings.

Instead, it is still valued as a “safe haven” blue chip like Coca Cola and P&G – both of which face fewer short-term challenges than Nike. To make matters worse, Nike’s bleak outlook for its gross margins could prompt analysts to lower their full-year earnings forecast, which would cause its price-to-earnings ratio to rise.

It’s not the right time to buy Nike

Nike’s business will do well in the long run, but its stock could drop much further as the bear market drags on. Investors should either buy higher growth games like Lululemon or stick to more stable blue chips instead.

Leo Sun has no position in the stocks mentioned. The Motley Fool holds positions and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: Long Calls $47.50 in January 2024 on Coca-Cola. The Motley Fool has a disclosure policy.

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