NIKE Stock Continues to Face Macro Headwinds, Analyst Says

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NIKE Shares (NYSE: NKE) have fallen 34.4% this year, and the stock is currently trading just above its 52-week low of $103.46 with a June 23 closing price of $108. The share price plunge was compounded by several factors, including a volatile macroeconomic environment, rising COVID cases in China and the ensuing lockdowns there.

Moreover, on June 23, according to a CNBC report, NIKE has announced that it will make a full exit from Russia. Earlier in March this year, the sports footwear and apparel retailer announced it would temporarily suspend operations at its company-owned and operated stores in Russia following the attack on Ukraine.

These developments prompted many Wall Street analysts to lower their financial estimates for the company. Recently, BTIG analyst Camilo Lyon looked into these developments. NIKE is expected to report its fiscal fourth quarter results on June 27.

The analyst is of the opinion that the increase in COVID cases in China, leading to strict shutdowns in Shanghai and Beijing in April and May, could have hampered the demand for NKE products in this country.

NIKE management said on its fiscal Q3 earnings call that while it expects fiscal Q4 revenue to improve sequentially quarter over quarter in Greater China, it continues to “monitor closely the operational impact related to recent COVID lockdowns”.

China is an important market for NKE, and this region contributed approximately $2 billion in revenue in the third quarter of the fiscal year. However, on a currency-neutral basis, sales in Greater China fell 8% year-on-year in the third quarter to $2.16 billion.

Given the impact of the lockdowns in China, analyst Lyon forecast that sales in Greater China in the fiscal fourth quarter would be down “-25% with ~90 basis points [basis points] headwind to the company’s margin on higher negative margin sales, resulting in our gross margin estimate of 45.8% (fixed year-over-year). »

A slowdown in online sales

Another concern for analyst Lyon is that analyst tracking data has indicated that there are signs of a marked slowdown in NKE’s direct-to-consumer online channel, particularly in North America. According to its estimate, direct online traffic in North America fell 8% in the fourth quarter “resulting in what could be a low to mid-single digit decline in NA [North America] online sales.

The analyst also remains concerned about the “frequency of NKE’s ‘immediate’ orders” to its wholesale partners “perhaps because DTC [direct-to-consumer] slowed faster than expected, creating a need to place late inventory. »

Lyon believes that sales in NIKE’s apparel and footwear category declined “potentially signaling consumer fatigue online after last year’s consumer stimulus-induced shopping frenzy.”

In this scenario, Lyon believes that a combination of supply chain disruptions, lockdowns in China and a potential slowdown in demand in North America and Europe could “create a glut of inventory that will lead to markdowns and pressure margins”.

While the analyst acknowledged that “NKE is generally incredibly well equipped to handle such disruptions”, Lyon fears that “these issues are simply too big to control, even for the best-run sports brand in the world”.

As a result, the analyst stayed away from the stock with a Hold rating.

Other Wall Street analysts, however, are cautiously bullish on the stock with a moderate buy consensus rating based on 15 buys and seven holds. The average NKE price target of $142.05 implies upside potential of 31.5% from current levels.

Conclusion

While analysts besides Lyon are cautiously optimistic about NIKE, it remains to be seen how NIKE, which has faced macro headwinds, will weather these challenges.

These challenges aside, NIKE scores a solid 8 out of 10 on the TipRanks Smart Score system, indicating that the stock has a high potential to outperform the market. The TipRanks Smart Score system is a quantitative, data-driven scoring system that analyzes stocks on eight main metrics and offers a Smart Score ranging from 1 to 10. The higher the score, the more likely the stock is to outperform the market .

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