Nike [NKE] is expected to report a 20.5% drop in year-over-year earnings and a 0.1% dip in revenues when it reports its second quarter (Q2) figures on 20 December. The company follows a financial year ending on May 31.
Analysts at Zacks forecast that the sportswear and equipment group will report earnings of $0.62 per share and revenues of $11.23bn.
Its figures will mark a slowdown from the first quarter when it posted a 16% hike in revenues to $12.2bn and EPS of $1.16 per share, up 22%.
"Our first quarter financial results would have been even stronger if not for supply chain congestion resulting in lack of available supply,” said John Donahoe, chief executive officer and president, Nike. The company’s chief financial officer, Matt Friend, added that the wholesale segment was worst hit as inventories fell as a result of “worsening transit times.”
The main drag on its performance will be production delays caused by global supply chain squeezes, longer transit times and COVID-19 outbreaks, which led to the closure of its Vietnamese and Indonesian factories.
In September the group lowered its outlook for fiscal year 2022, expecting sales to increase by mid-single digits, down from previous expectations of low double-digit growth.
Whether the challenges with the supply chain, port congestion and reduced air freight capacity, as well as the emergence of the new Omicron coronavirus strain, will further impact the business will be a key focus of the Q2 announcement.
Any upside to the forecasts will lead to a boon to the group’s share price, which despite the September announcement has climbed 15% in 2021.
There is hope, however, that the results may not be as bad as first feared after the company announced a hike of 11% in its quarterly dividend rate in November.
Zacks said that this “reflects the confidence in its financial position and the ability to generate sufficient cashflows”.
Underlying demand should be strong as shoppers flock back to stores post-lockdown, the appetite for online shopping continues and hybrid working means there is a greater need for casual wear rather than shirt and tie.
Nike is expected to have benefited from recent moves into the virtual world to meet the changing trends of its younger customers. It has recently bought RTFKT, which makes digital sneakers, offering Nike a chance to monetise the metaverse and potentially develop its own virtual trainers range.
Nike has also partnered with games group Roblox to launch Nikeland – a virtual games area, including a digital Nikeland showroom with a collection of shoes, clothes and other accessories for avatars to wear.
Its direct-to-customer channel and its Nike Training Club and shopping apps are also likely to have boosted demand in Q2 and beyond.
“The company anticipates delays in transit times to continue throughout fiscal 2022,” Zacks says. “Moreover, elevated freight and rising selling and administrative expenses have been eclipsing the company’s margin growth. We expect prudent growth efforts and favourable market conditions to continue supporting the company and help it overcome the headwinds.”
“The company anticipates delays in transit times to continue throughout fiscal 2022...Moreover, elevated freight and rising selling and administrative expenses have been eclipsing the company’s margin growth. We expect prudent growth efforts and favourable market conditions to continue supporting the company and help it overcome the headwinds” - Zacks
According to MarketScreener, analysts are also looking beyond near-term bumps to a brighter future for the stock. They have a consensus ‘buy’ rating and a target price of $181 – up from the $161.36 it reached at the close on 17 December.
Deutsche Bank has a price target of $199 and a ‘buy’ rating and expects Nike’s Q2 earnings to beat consensus. Senor equity research analyst Gabriella Carbone anticipates slightly better than expected sales in North America, but lower than consensus forecasts in China given its strict zero-COVID-19 strategy.
“We're intrigued by Nike shares as we see that the negative supply chain data points are largely behind us, with Vietnam factory shutdowns recovering into early CY22 and elongated transit times” - Wells Fargo analyst Kate Fitzsimons
Wells Fargo resumed coverage of Nike with an ‘equal weight’ rating and a $175 price target.
“We're intrigued by Nike shares, as we see that the negative supply chain data points are largely behind us, with Vietnam factory shutdowns recovering into early CY22 and elongated transit times,” says Wells Fargo analyst Kate Fitzsimons. The firm also tips Nike for a “likely acceleration into fiscal 2023, lapping the previous fiscal year's supply chain and Covid disruptions”, as reported by The Street.
UBS has a ‘buy’ rating and a $185 price target with analyst Jay Sole – as reported by The Fly – bullish about the “sooner than assumed reopening of Vietnam factories and favourable pricing trends suggesting potential gross margin upside”. However, Sole also warned about a slow recovery in China and Omicron-related lockdowns in Europe.
Indeed, further pandemic restrictions would be a drag on store sales, consumer confidence and further batter supply chains. But Nike can stay resilient, both during the current crisis and beyond. It has the digital infrastructure and innovative drive to keep powering ahead.