Near-Term Headwinds Send Nike To The Bargain Basement

Published on
  • Nike falls on a mixed FQ1 report that has the analysts worried about margins.
  • Bloating inventory led to increased markdowns and this is expected in Q2 as well.
  • Near-term headwinds are weighing on shares but a long-term buying opportunity is on the way.

Nike’s (NYSE:NKE) FQ1 report is a wake-up call for investors who’ve not clued into the fact inventories are bloating across the retail universe. The cause begins with the pandemic shutdowns and ends with pandemic spending and supply chain hurdles that still plague the industry today.

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Nike is not the first to report these problems, Target (NYSE:TGT) and Walmart (NYSE:WMT) both warned about inventories earlier this year, and that was and will be echoed by others as well. 

The need to shed inventory is resulting in markdowns, wholesale actions, and declining margins that may plague the industry well into 2023 and that is weighing on Nike’s share prices. The stock is down more than 10% in the wake of the report and heading into the bargain basement although it is not there yet.

The issues with inventories have only just begun, and the stock is trading at 27X its earnings, so there is a possibility Nike's share price could retest the pandemic lows before the correction is over. 

The Sell-Side Is Selling Nike, Inc

The insiders have been selling the stock which is a telling indicator although their net holdings and trading activity are negligible in the greater scheme of things. The insiders are holding only 0.4% of the stock and sold a teeny 0.02% over the last three quarters, but this is amplified by a shift in the institutional activity as well.

The institutions hold about 64% of the stock and turned bearish two quarters ago. The balance of activity is a net reduction worth a little more than 1.1% of the market cap and the pace may pick up now that Q1 results are in. One notable seller is B. Riley Wealth Management which cut nearly 25% of its holdings in September alone. 

The analysts still rate Nike a Moderate Buy but the sentiment is slipping. The Moderate Buy consensus rating has held steady over the last 12 months but is edging lower on analysts' activity since the FQ4 and now the FQ1 results.

There were 3 commentaries released in the days leading up to the release and another 17 after it and all but one included a price target reduction. The one that didn’t lower its price target didn’t issue one but did issue a downgrade to Neutral from Buy. The takeaway is the analysts still see upside for the stock but less and less every day and that is not good for share prices. 

Nike Takes The Bull By The Horns 

Nike had a good quarter in regard to revenue and earnings with both beating the analyst consensus estimates. The bad news is that revenue grew by 3.6% and beat the consensus by 330 basis points driven by increased markdowns and wholesale activity that shaved 220 basis points off of the gross margin.

This left the GAAP earnings at $0.93 or $0.01 better than expected but trailing top-line strength by 100 bps. Assuming the mark-down activities continue into the Q4 period and there is no reason to think they won’t, this means additional weakness with the added risk of slowing sales volume. In regard to inventory, inventory is still up 44% on a YOY basis with a good portion stuck in transit. 

“Our focus continues to be the consumer, as we take action to navigate near-term dynamics while expanding long-term structural benefits through our Consumer Direct Acceleration strategy,” said Matthew Friend, Executive Vice President and Chief Financial Officer, NIKE, Inc.

The Technical Outlook: Nike Falls To 30-Month Low

Nike fell to a 30-month low on the news and its earnings, dividend, and buybacks could not spark a rebound. The stock appears to be headed toward the pandemic low near $60 but there could be support near $65 or even $80.

If the market confirms support at one of these levels Nike would be an attractive stock assuming there is also some improvement in the outlook and a shift in the sell-side activity


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Article by Thomas Hughes, MarketBeat