To say that investors were disappointed with Thursday’s first-quarter earnings report from Nike Inc. (NYSE: NKE) is stating the obvious. Shares tumbled by around 10% in after-hours trading and opened down nearly 12% on Friday. While high inventory levels get a lot of the blame, the company faces a number of other challenges to get back on track.
Quarterly sales of $12.69 billion actually beat the consensus estimate of around $12.29 billion on the strength of full-price realizations on new seasonal apparel, and earnings per share (EPS) came in a penny above the consensus estimate of $0.92. The trouble starts in the company’s second quarter, ending in November.
The company forecast revenue growth for fiscal 2023 was slightly lower than expected, dropping from up 6% to 8% to a new range in the low to mid-single digits. Forecast gross margin and EBIT were also cut based on expected markdowns of nearly 25% to clear out existing inventory. Currency exchange headwinds doubled from previous guidance for a 4% dip to a new forecast of an 8% hit. Two other bright spots for the quarter were a less-than-expected decline in the company’s China business and its solid growth in direct sales to consumers.
Here is a look at how several analysts reacted to Nike’s outlook.
Morgan Stanley maintained an Overweight rating on the stock but cut the 12-month price target from $129 to $120. The firm said that Nike’s updated guidance was “relatively conservative.” The company’s topline growth outlook for the second half of the year drops to flat year over year compared to the first half outlook that calls for year-over-year growth of 7%. Operating income, forecast to decline by 18% year over year in the first half of the year, is expected to drop by 29% in the second half. Nike is also guiding EBIT margin to 150 basis points below the level seen in the 2009 recession.
On the one hand, a “meaningful” recession could make that worse, in Morgan Stanley’s opinion, sending revenue and EBIT down more than currently expected. On the other hand, if Nike’s full-year guidance meets expectations for the current quarter, revenue for the year could rise to around $51.5 billion, nearly 17% higher than 2022 sales, and EBIT margin could rise by more than 13% year over year.
Nike’s decision to take its inventory medicine in the second quarter works in the company’s favor, according to Morgan Stanley, because the short-term hit to gross margins “ensure[s] a cleaner future marketplace and premium positioning.” Nike also remains committed to its direct-to-consumer business, an area that saw sales growth of 8% year over year in the first quarter.
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