Nike stock soars after strong earnings. Investors feared the worst.

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Nike said shoppers were returning to physical stores, but the company also noted some weakness in China.

Rui Vieira/POOL/AFP via Getty Images


Nike

surged in premarket trading after its strong fiscal third-quarter results. The robust report is a welcome update from the athletics giant, whose shares have been pummeled this year.

Nike (ticker: NKE) said Monday it earned 87 cents a share on revenue that rose 4.8% year-over-year to $10.9 billion. The consensus called for Nike to earn 72 cents per share in the quarter, up from 90 cents a year ago, on sales of $10.6 billion.

Like so many other companies, Nike said it saw higher transportation costs, but its gross margins rose 100 basis points in the quarter, helped in part by lower discounts and lower exchange rates.

Direct-to-consumer sales tracked by the Nike Direct division increased 17% on a currency-neutral basis in the quarter, while Nike’s digital sales jumped 22%, led by a 33% increase in North America. North.

Nike is up 4.9% at $136.50 in premarket trading on Tuesday morning.

The better-than-expected results were probably a relief, given the stock’s recent performance. Shares of Nike have fallen 22% this year as investors worried about issues related to a slower rebound in China and supply chain constraints.

The company noted some weakness in China in its release, but it saw stronger results elsewhere in the Asia-Pacific region, and also said traffic was normalizing in its retail stores as shoppers returned to physical locations owned by the company.

For the full year, Nike said it expects mid-single-digit year-over-year revenue growth, although it noted that in the fourth quarter ongoing fiscal year, revenue will decline from a strong period a year ago. That said, he anticipates another quarter of sequential improvement in China this quarter and further margin expansion.

On the conference call, Nike said demand remains robust across its brand portfolio, so much so that growth in the third quarter would have been even stronger had it not been for inventory constraints. The company said inventory supply was starting to improve, but it was still experiencing long transit times.

Expectations were measured in the report, and even the bulls tempered their outlook ahead of the results.

Last week, Credit Suisse analyst Michael Binetti reiterated an outperform rating and $160 price target on Nike, but lowered his earnings estimates for the quarter and full year. He notes that the move comes amid a “growing list of global macro factors (inventory shortages, Russia/Ukraine, new lockdowns in China and consumer inflation in the US/Europe)”, although he always be optimistic about the company’s long-term prospects.

Similarly, Randal Konik of Jefferies lowered his price target to $185 from $200 while still maintaining a Buy rating on Nike. He writes that “Nike has retained a predominant chunk of the web data we track at the brand level and within specific sneaker lines, while the average sale price data also looks promising. With Nike’s recent valuation compression…and compelling strategies to propel growth, we recommend buying stocks. Still, he is concerned about the “volatile macro backdrop,” leading him to cut his estimates for the full year.

The move comes after UBS cut its price target earlier this week, but remained bullish.

While analysts may be cautious about the near-term outlook, Nike remains a street favorite, with three-quarters of analysts tracked by FactSet pricing it at Buy or equivalent. The analysts’ average price target of around $174 is well above the current Nike stock price. In Wednesday morning trading, shares rose 3.2% to $123.26.

Nike’s bottom line has consistently exceeded expectations in recent years. The company received a huge boost from the pandemic as demand soared, but its outlook has been more critical to the stock’s performance lately as the market wonders how pandemic winners can sustain their momentum. It is also one of the Western brands facing slowing sales in China amid the Xinjiang cotton controversy.

Write to Teresa Rivas at [email protected]

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