Is Nike stock a sell ahead of upcoming earnings? (NYSE: NKE)


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Summary in seconds

I have a Hold investment note for Nike, Inc. (NYSE: NKE) shares. In my previous article for NKE published on September 14, 2021, I addressed the company’s “supply chain issues” and its “DTC or Direct-to-Consumer sales”. I fix my attention to Nike’s upcoming fourth quarter fiscal 2022 (YE May 31) results in this latest update.

Nike stock appears to be selling ahead of upcoming earnings as its bottom line is expected to come in below market expectations. However, I think NKE is more deserving of a Hold rating after considering both its decent long-term growth prospects and its reasonably fair valuations.

Key indicators of NKE shares

Before taking a look at Nike’s fourth quarter earnings, it is necessary to first look at NKE’s recent third quarter performance.

In my opinion, the third quarter of fiscal 2022 was a mixed quarter for Nike based on an analysis of certain key metrics.

On the negative side of things, supply chain disruptions and downward pressure on future prices are major concerns.

At the company’s third quarter fiscal 2022 earnings briefing on March 21, 2022, NKE disclosed that its transit times in the last quarter were two weeks and six weeks longer than before. compared to what they were for the third quarter of fiscal 2021 and before COVID-19, respectively. It looks like supply chain disruptions will remain a headwind for Nike for the foreseeable future.

Nike also revealed during its third quarter earnings call that due to “a lack of supply, we have a few of our geographies with total price realization well above our 65% definition for the full health of the market”. This could translate into lower prices and lower gross profit margins for NKE in the coming quarters.

On the positive side, the Greater China market and NKE’s digital revenues for the last quarter were above expectations.

Nike’s Greater China business rebounded from a -24% (constant currency) year-on-year sales decline in the second quarter of fiscal 2022 to reach a much tighter revenue contraction in YOY of -8% (adjusted for currency effects) in Q3 FY2022 It was also much better than the Wall Street analyst consensus Q3 China revenue growth forecast of -14 % according S&P Capital IQ.

Separately, the company’s NIKE-branded digital sales were up +22% (currency-adjusted) year-over-year in the last quarter. NKE pointed out during its third-quarter fiscal 2022 earnings call that “we are earning a higher gross margin on our sales through digital channels.” Nike also pointed to digital sales as a key driver in supporting “high teen operating profit (growth for the business) over a multi-year period.”

In the following sections of the article, I will assess Nike’s short-term and long-term prospects, as well as its valuations.

When does Nike release its earnings?

Nike will release the company’s fourth quarter fiscal 2022 results on Monday, June 27, 2022, as announced on May 24, 2022.

I discuss expectations for NKE’s upcoming earnings in the next section.

What to expect from earnings

A recent Seeking Alpha News article from June 21, 2022 pointed out that sell-side analysts are “divided on whether to call” Nike’s upcoming Q4 FY2022 results “a beat or a miss.” . This is validated by the wide range of earnings per share or EPS estimates for NKE. The most bearish analyst believes Nike’s EPS will decline -30% year-over-year from $0.93 in the fourth quarter of fiscal 2021 to $0.65 in the fourth quarter of fiscal 2022. On the other hand, the most optimistic analyst is of the opinion that NKE will still be able to generate positive growth with its EPS increasing by +2% YoY to $0.95 in the fourth quarter.

The consensus EPS forecast for the fourth quarter of fiscal 2022 for Nike is $0.81 at the time of writing. My projections indicate that NKE will reach an EPS of $0.79 for the next quarter, implying a slight shortfall of -2.5%.

I arrive at my fourth quarter EPS estimate for Nike based on assumptions that the negative impact of the COVID-19 lockdowns in mainland China will be partially offset by other positive factors like continued revenue growth on other markets such as North America and no further deterioration in the supply chain situation.

What are Nike’s prospects?

Nike’s long-term growth prospects remain intact, despite the short-term headwinds as discussed in previous sections of this article.

NKE noted during the company’s third quarter fiscal 2022 earnings briefing that “we continue to be optimistic and positive regarding our long-term algorithm for fiscal 25.” In line with its previous fiscal 2021 fourth quarter earnings call on June 24, 2021, Nike previously guided “high single-digit to low double-digit” revenue expansion and revenue growth. “medium to high” for the long term. NKE also noted at the fourth quarter fiscal 2021 investor briefing that it expects its gross profit margin and EBIT margin to increase to “high 40s” percentage levels and “high teens”, respectively by fiscal year 2025.

The company’s long-term financial targets are in line with sell-side analyst forecasts. According to financial projections from S&P Capital IQ, Nike is expected to achieve revenue and normalized EPS CAGR of +9.9% and +17.7%, respectively, for the period of fiscal 2022-2025. Wall Street also sees NKE generating a gross profit margin of 48.6% and an EBIT margin of 17.9% in fiscal year 2025.

The main driver of Nike’s faster growth and improved profitability over the long term is the company’s DTC or Direct-to-Consumer business, or what it calls NIKE Direct. NKE has set a target for NIKE Direct’s revenue contribution to grow from 40% in fiscal 2021 to 60% by fiscal 2025, as outlined in its Q4 earnings briefing. fiscal 2021, and that should help the company achieve its long-term goals.

But Nike is less likely to deliver similar results to its long-term growth algorithm as early as fiscal 2023. When asked if fiscal 2023 will be “some sort of algorithm-like year” during his call to investors in the third quarter of fiscal 2022, NKE did not address the issue directly, and only noted that “the foundation is laid for another year of strong growth” for fiscal 2023.

Is Nike stock at its fair value now?

Nike stock is fairly valued, or slightly overvalued, at best now in my opinion.

The market values ​​NKE at a PEG ratio of around 1.5 times. This is based on Nike’s consensus for the next twelve months Normalized P/E of 26.4 times now according to S&P Capital IQ data, and the company’s forecast EPS CAGR of +17.7% for the period of fiscal year 2022-2025, as mentioned in the previous section.

A general rule is that stocks are overvalued with a PEG multiple greater than 1. But a PEG of 1.5 times seems to be fair for a global market leader like NKE. Notably, Nike was named as biggest clothing brand in “Kantar BrandZ Most Valuable Global Brands” for 2022.

Is the NKE share a buy, a sell or a hold?

NKE action is pending. Short-term headwinds aside, Nike’s current valuations have largely priced in the company’s long-term growth expectations.


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