One of Nike’s problems is that investors are questioning the continuing strength in its North American market.
Emily Elconin/Bloomberg
Nike shareholders aren’t used to losing. The company’s upcoming earnings report is a chance for the athletic giant to settle the score after its recent selloff.
Nike (ticker: NKE) has long been a powerhouse, rising nearly 90% in the past half decade, ahead of the S&P 500’s 60% gain. And there have been plenty of years when it has easily outpaced its consumer discretionary peers as well, with the stock reaching all-time highs during the pandemic.
Yet the stock, like so many others, has been pummeled this year: Nike has lost almost a third of its value in 2022, compared with the broader market’s roughly 20% loss.
Consensus calls for Nike to earn 81 cents a share in its fiscal fourth quarter, due out after the close on Monday, on sales of $12.07 billion.
That would be a decline from the year-ago period, when Nike earned 93 cents a share on revenue of $12.34 billion. Still, its full fiscal year top- and bottom-line should be up year over year, thanks to strength in earlier quarters.
Analysts have been racing to lower their estimates ahead of the report. According to FactSet, EPS revisions for the quarter have come down more than 5% in the last month, and are down 1.1% in the past week alone.
So what is fueling the souring sentiment?
First and foremost China: Nike was caught in the middle of the continuing controversy about alleged human rights violations in Xinjiang. It faced a backlash in China over Western criticisms of the treatment of the Uighur population, while Western consumers argued the company wasn’t doing enough to distance itself.
Yet that has largely been eclipsed by worries about ongoing demand destruction from large-scale lockdowns amid China’s zero-Covid policy. That has already hurt sales in the region, as evidenced by the most recent earnings report for Adidas (ADDYY) last month.
That is not Nike’s only problem though. Investors are also questioning the continuing strength in its home North American market.
While athleisure companies like lululemon athletica (LULU) and Foot Locker (FL) turned in good quarters, the worry is that consumers are feeling increasingly pinched by inflation, and are most likely to pull back on casual goods—like sneakers.
After all, shoppers stocked up on them during the pandemic and they don’t fit the aesthetic of vacations and weddings, which are back in full force after two years of delay. High apparel inventory at other stores have also sparked worries of widespread discounting.
Herein lies the opportunity. Back when Nike last reported results in March, it said that its China business would improve sequentially and that it was working through inventory and supply chain headwinds.
However, the consumer environment has shifted so rapidly—with management teams caught off guard—that investors have put little stock in months-old commentary.
Therefore, while beating top- and bottom-line estimates will help, Nike’s stock may be best served by the company’s remarks on these points.
Even if its full-year guidance is a bit light—as many analysts now anticipate—if it can show that its China business has kept improving as it predicted, and if its inventories and North American sales look healthy, that could dispel a lot of the worry around the shares.
Of course if it can’t deliver on those key areas that are most worrying investors, Nike could remain an underdog.
Write to Teresa Rivas at [email protected]
