Nike's 10-Q: What You Need To Know

Nike Inc NKE released its fiscal third-quarter 10-Q regulatory filing Thursday, revealing multiple metrics that indicate there is plenty of work ahead for the company before it can show "sustained trajectory improvement," according to Canaccord Genuity.

The Analysts

Canaccord's Camilo Lyon maintains a Hold rating on Nike's stock with an unchanged $62 price target.
Cowen's John Kernan maintains a Market Perform rating on Nike's stock with an unchanged $68 price target.

Canaccord: More Work Ahead

Nike's 10-Q report made it clear management has work to do before the stock's "lofty" valuation multiple of 26.5x NTM P/E can rate higher, Canaccord's Lyon said in a research report. Here's a summary of the key points the analyst compiled from the regulatory filing:

North American inventory during the quarter was up 5.4 percent, while sales fell 5.6 percent. This marks the worst spread seen in nine quarters, so the company is likely to focus on its factory outlet channel to work through excess inventory.

Nike's North American direct-to-consumer business was up "only" 5 percent in the quarter on a comparison that was easier by 1,200 basis points. On a two-year basis, Nike's North American DTC business growth slowed from 1,100 basis points in the prior quarter, which should be seen as a sign the breadth of its products remains "soft."

North American comps were negative 1 percent; EMEA comps of 1 percent mark a significant slowdown from 10 percent and 11 percent, respectively, in the prior two quarters. Nike's strength and popularity in China continued, as comps accelerated 700 basis points sequentially on a two-year basis.

Average selling price growth and unit growth in footwear were positive 1 percent and were key drivers of total revenue growth.

The gross margin fell 70 basis points due to more discounting, foreign exchange and other costs. Positive contributions to gross margin came from lower product costs and the DTC business.

Cowen: An Unchanged Stance

Nike's 10-Q has no impact on Kernan's thesis on Nike's stock, the Cowen analyst said. Nike's status as "the preferred" athletic apparel brand across all demographic groups remains in place, he said.

The company continues to build a moat around its business through a combination of:

Offensive investments.
Innovation through new products like Flyknit.
Creating a digital connection with consumers.
Direct-to-consumer offerings that serve as a "manufacturing revolution."

Nike's investments in its business should create a multiyear inflection in gross margin beyond its prior peaks, Kernan said. Nike could reach $4 in EPS potential through fiscal 2022 while returning more than $21 billion to shareholders through dividends and stock buybacks, he said.