ii view: Nike shares suffer nasty fall after sales outlook cut

Second-quarter results to 30 November

• Revenue up 1% year-over-year to $13.39 billion
• Earnings up 21% to $1.03 per share
• Share buybacks of $1.2 billion

Chief Financial Officer Matthew Friend said 

“Nike’s second-quarter financial performance was a turning point in driving more profitable growth. As we look ahead to a softer second-half revenue outlook, we remain focused on strong gross margin execution and disciplined cost management.”

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ii round-up:

Sports footwear and clothing maker Nike Inc Class B (NYSE:NKE) lowered its full-year sales forecast as ongoing consumer caution and unfavourable currency movements hindered performance.

Second-quarter sales to the end of November rose 1% to $13.39 billion, marginally missing Wall Street hopes, with the Dow Jones company now forecasting full-year sales growth of just 1% compared to its prior hopes of mid-single digits.

Nike shares fell more than 10% in after-hours US trading having come into this latest news up around 4% year-to-date. That compares to a 40% gain for German rival adidas AG (XETRA:ADS) and a near 13% gain for the Dow index itself during 2023.

Nike flagged plans to potentially cut up to $2 billion in costs over the next three years. Focuses will include both an increased use of tech driven automation and a simplification of its product range. 

Sales at its key footwear category fell both in North America and China during the quarter, retreating 5% and 1% respectively. Such sales gained 6% and 18% in Europe & Africa and Asia & Latin America. 

Broker Morgan Stanley reiterated its ‘overweight’ on the shares given hopes for product innovation, but lowered its estimate of fair value per share to $124 from a previous $132. 

Third-quarter results are likely to be announced mid-to-late March. 

ii view:

Nike sells to its customers both directly via its own stores and online and indirectly via its wholesale division, supplying retailers such as Dick's Sporting Goods Inc (NYSE:DKS), Foot Locker Inc (NYSE:FL), and JD Sports Fashion (LSE:JD.). Footwear generates its biggest slug of sales at around two-thirds, followed by clothes at just over a quarter and equipment the balance. Geographically, North American generates its biggest chunk of sales at around two-fifths, followed by Europe, the Middle East and Africa at just over a quarter, China at around 15% and Asia and Latin America the balance.  

For investors, heightened borrowing costs will be having some dampening impact on customer spending, and costs broadly for businesses remain elevated. Relations between the West and its major market China remain strained, while environmental considerations for the wider fashion industry should not be ignored. 

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More favourably, product and geographical diversification are enabling challenges in some areas to be countered by strengths in others, and management initiatives to cut costs are being pursued. Likely interest rate cuts in 2024, particularly in the US, should assist customer spending, while shareholder returns remain a focus, with the dividend payment having been increased more than 20 years in a row.

Nike shares had staged a decent recovery since late September and were sat at a seven-month high. It's a solid, well-run business with potential to generate positive returns for shareholders over the long term. Lower interest rates will also help customer affordability, and some investors might decide to take advantage of this negative share price reaction. Others, however, might feel that high interest rates are still working their way through the economy and may stifle growth for some months to come, threatening near-term results. In that case, you might prefer to watch for signs that this is a one-off.

Positives: 

• Product and geographical diversity
• Ongoing shareholder returns

Negatives:

• Uncertain economic outlook
• Subject to currency moves

The average rating of stock market analysts:

Buy