Nike Inc, the athletic apparel and footwear juggernaut, is set to unveil its fiscal Q4 ’24 earnings on June 27th after the market close, with its stock having dipped about 50% from late November 2021 highs of $179. Currently, the stock has been lingering in the high $80s to low $90s range since the third week of April.
Sell-side analysts are eyeing $0.84 in earnings per share, $1.54 billion in operating income, and $12.85 billion in revenue for the quarter, expecting year-over-year growth of 27%, 26%, and flat revenue growth. Notably, this would mark the second time in 11 quarters for Nike to achieve a year-over-year growth in operating income, indicative of a significant shift.
Amidst the challenging landscape post-Covid, Nike’s struggles have been evident in its modest growth rates. Over the last 10 quarters since stock peaked in November ’21, Nike’s average revenue growth has been 5%, while operating income and EPS have seen a decline of 8% and 1% respectively.
An insightful look at Nike’s income statement reveals a gradual erosion in operating income since late 2019, despite a modest rise in SG&A expenses over the same period. This trend suggests potential concerns around brand stagnation, particularly in footwear, as highlighted by Nike’s CEO John Donahoe.
Assessing the Technical Landscape
Nike’s monthly chart hints at a potential breakthrough if the stock can surge past $100, paving the way for further growth towards the 50-month moving average at approximately $120-$121 per share. Interestingly, the stock appears more oversold now than during the 2008 crisis, reflecting a precarious yet intriguing position.
However, the fundamental challenge lies in the perceived staleness of the Nike brand and footwear line, which could potentially restrict significant upward movement in the stock price, keeping it range-bound at current levels.
It’s noteworthy that the stock witnessed lows in late September ’22 and early October ’22 around the $80-$82 mark, serving as a crucial price level indicative of deeper underlying issues if breached with substantial trading volume.
Evaluating Valuations
Nike’s projections for fiscal ’24 and ’25 demonstrate a tepid 1% revenue growth forecast for both years, translating into a modest 4% EPS growth in fiscal ’25 compared to a projected 16% growth this year. This subdued outlook suggests analysts’ cautious sentiment and lack of anticipatory excitement.
For fiscal ’25, the consensus estimates point to $3.88 in EPS on $52.1 billion in revenue. Currently trading at $95 per share, Nike’s valuation stands at 24x expected EPS, amidst stagnant revenue growth of 1%, offering limited enthusiasm for prospective investors.
On a positive note, Morningstar assigns a $129 fair value estimate for Nike, implying a 25%-26% discount to the stock’s intrinsic value from their model, which may spark some optimism among investors.
Summarizing the Outlook
If Nike follows the anticipated fiscal ’25 trajectory, it would mark two consecutive years of marginal 1% revenue growth, signaling a concerning trend. The upcoming fiscal ’25 guidance will play a pivotal role in deciphering Nike’s future trajectory and investor sentiment.
Nike has successfully addressed the inventory glut issues, evident in the recent quarters with revenue growth outpacing inventory growth, thereby alleviating the cash flow constraints associated with inventory surplus.
Although China represents a significant portion of Nike’s revenue, concerns linger around the brand’s perceived staleness amidst evolving market dynamics. Monitoring China’s economic landscape remains crucial, although fundamental changes may be limited in the near term.
Given the lack of compelling catalysts, investors are advised to exercise caution and monitor Nike’s performance closely before making significant investment decisions.
One notable concern stems from Nike’s financial reporting practices, specifically the absence of a cash flow statement in its earnings release, diverging from the industry standard post-Reg FD era. This archaic practice may present challenges for investors in assessing Nike’s financial health promptly.
Remember, none of the insights shared here should be construed as advice or recommendations. The past performance of Nike does not guarantee future outcomes, and investing always carries inherent risks. Stay informed and vigilant.