Nike Q1 preview: Where next for Nike stock?

When will Nike release Q1 earnings?

Nike will release first quarter earnings after US markets close on Thursday September 29. A conference call will be held on the same day at 1400 PT.

 

Nike Q1 earnings consensus

Wall Street forecasts Nike will report a 0.6% year-on-year rise in revenue to $12.32 billion in the first quarter, while diluted EPS is expected to fall over 19% to $0.94, according to consensus numbers from Bloomberg.

 

Nike Q1 earnings preview

It could be a tough quarter for Nike considering revenue growth is stalling, profitability remains under pressure and its outlook under threat.

The tepid sales growth expected this quarter is partly down to tough comparatives from the year before and will be the result of a 0.3% dip in sales of Nike apparel, countered by higher sales of Nike footwear (+1.1%), equipment (+0.5%) and its Converse products (+2.3%).

China will be closely watched as this is the main drag on sales, which are forecast to decline for the fourth consecutive quarter, this time by 14.8%. Sales will grow in every other region, with its largest market in North America set to return to growth this quarter after a temporary drop in the last quarter, but things remain tough in China due to Covid-19 disruption.

Nike is aiming to deliver low double-digit sales growth over the full year, but this assumes a recovery in China that is yet to materialise. A beat in China would be welcomed, but investors may have to wait until the second quarter for reassurance considering this is when Wall Street believes sales in in the country will return to growth.

The other threat comes from people’s pay cheques being squeezed as they are forced to spend more on necessities, leaving less for discretionary goods. Notably, markets are already wary of the full year target considering they are pencilling-in sales growth of less than 7% this year.

The shift in strategy continues as Nike focuses on selling more directly to customers rather than through wholesale partners, which it has become more selective about in recent years. Direct to Consumer sales are forecast to rise 7.4% in the first quarter while its wholesale division is expected to report a 3.4% fall. However, managing more of its own sales will be more challenging with supply chain problems, especially if rivals take advantage of increased shelf space at retailers.

Meanwhile, earnings are set to decline as margins continue to come under pressure and expenses rise. Its gross margin is set to contract to 45.4% in the first quarter from 46.5% the year before as higher inventory rates as well as rising logistic and freight costs take their toll. Inventory stood some 23% higher at the end of the last quarter than the year before and these elevated levels could pose a further risk to margins if Nike is forced to cut prices to shift it – although inventory is expected to start declining this quarter.

At the same time, overheads are expected to rise some 7.1% in the period while spending on demand creation, which includes activities such as marketing, is expected to increase 9.5% from last year as it continues to invest in its Direct-to-Consumer business and grapples with higher wages.

The backdrop is still difficult for Nike, with Covid-19 still causing trouble in China and inflation posing problems in its other markets and increasing costs. Investors are set to remain cautious over Nike’s ambitions this year until they see evidence that things are improving.

 

Where next for NKE stock?

Nike shares have fallen over 45% since peaking at fresh all-time highs just under a year ago after falling into a downtrend with a series of lower highs and lower lows that has sent the stock to a two-year low.

A jump in trading volumes over the past five sessions suggests the recent fall could be gaining momentum, although the RSI is approaching oversold territory. The stock will continue to drift toward $93.70 if this pressure persists and $91.60 will come into play if this fails to hold. A break below here would be more significant as it opens the door for a sharper drop toward the $84 level of support seen in April and May 2020.

The first upside target is $101.80 but $103.50 would be a more significant level to recapture. The year-long downtrend remains intact and is currently in-line with the 50-day moving average, which will need to be reclaimed to break it.

The 36 brokers that cover Nike believe the selloff this year has been overdone with an average target price of $128.45, implying there is over 31% potential upside going forward and the stock can return to levels last seen in April. However, expectations have been curtailed in recent months considering this sat at over $150 just a couple of months ago.

 

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