9 Nike Analysts On Q2 Earnings Beat, Improving Inventory Trends, China: 'Decidedly Upbeat'

Nike Inc NKE shares rallied Wednesday morning after the company reported shrinking margins but said inventory levels have improved slightly on a quarterly basis.

Nike reported fiscal second-quarter adjusted EPS of 85 cents on revenue of $13.32 billion. Both numbers missed consensus analyst estimates of 64 cents and $12.57 billion, respectively. Revenue was up 17% from a year ago.

Nike reported a 43% year-over-year increase in inventories to $9.3 billion, down from $9.7 billion in the previous quarter. Gross margins were 42.9% in the quarter, down from 45.9% from a year ago.

Nike Direct sales were up 16% in the quarter to $5.4 billion, while digital sales grew 25%.

Looking ahead, CEO John Donahoe said gross margins will likely decline by 2% to 2.5% next quarter as Nike continues to work through its inventories.

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Nike's Inventory Challenges: Bank of America analyst Lorraine Hutchinson said Nike's sales numbers were impressive, but the company still has some work to do to get inventories down to a reasonable level.

"It will use the rest of the year to better align inventory levels with demand through continued clearance and lower receipts," Hutchinson wrote.

Guggenheim analyst Robert Drbul said Nike's numbers were encouraging, and he expects the company will continue to improve heading into fiscal 2024.

"The inventory peak is now behind the company, with progress in North America, up 54%, below last quarter’s increase of 65%," Drbul wrote.

Oppenheimer analyst Brian Nagel said the market has been too pessimistic about Nike's future.

"Overall, we view last night’s quarterly announcement from NKE as decidedly upbeat and suggestive of a now even more powerful, digitally-driven business model, navigating successful more challenged macro conditions in the US and abroad," Nagel wrote.

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Nike's Progress In China: RBC Capital Markets analyst Piral Dadhania said Nike management is dealing with headwinds as planned, and the company's impressive quarter demonstrates clear underlying momentum.

"China inventories are clean, and business appears to have stabilised, putting the business in a strong relative position vs peers," Dadhania wrote.

BMO Capital Markets analyst Simeon Siegel said improving North American and China sales coupled with better-than-feared gross margins triggered the rally in Nike stock.

"Going forward, we expect GM guidance to again prove conservative and flag that unlike the majority of retail seeing the pandemic revenue pull-forward weigh on top-line, NKE's seeing material N.A. strength, with wholesale an interestingly positive call-out this quarter," Siegel wrote.

Morgan Stanley analyst Alex Straton said Nike's quarter was a warning for skeptics of the direct-to-consumer model.

"To us, this exceptional performance against a uniquely challenging backdrop & bloated inventory levels could speak to the long-promised DTC margin benefits finally materializing in NKE’s P&L," Straton wrote.

Nike's Margin Opportunities: Raymond James analyst Rick Patel said Nike's margin recapture thesis is still intact.

"We believe Nike is poised to significantly recapture margins given 350bp of pressure over the last two years has been from transitory issues (freight, inventory)," Patel wrote.

Telsey Advisory Group analyst Cristina Fernandez said Nike exceeded low expectations in the second quarter.

"Footwear was the standout, up 36% in CC driven by strong demand and wholesale partners replenishing inventory, while apparel (up 14%) reflected the pressure of more promotions and softer demand," Fernandez wrote.

KeyBanc analyst Noah Zatzkin says Nike's current valuation is fair given the challenging macroeconomic environment.

"While we view inventory progress positively (NA +54% y/y vs. +65% y/y in 1Q), we note there is more work to do, which will weigh on NT margins (3Q GM est. -300 bps y/y)," Zatzkin wrote.

Nike Ratings, Price Targets:

• Bank of America has a Neutral rating and upped the price target from $112 to $120.

• Guggenheim has a Buy rating and $135 target.
• Oppenheimer has an Outperform rating and $135 target.
• RBC Capital Markets has an Outperform rating and lifted the price target from $120 to $127. 
• BMO Capital Markets has an Outperform rating and bumped the price target from $110 to $120. 
• Morgan Stanley has an Overweight rating and increased the price target from $127 to $138. 
• Raymond James has an Outperform rating and raised the price target from $99 to $130.
• Telsey Advisory Group has an Outperform rating and updated the price target from $130 to $133. 
• KeyBanc has a Sector Weight rating.

NKE Price Action: Nike shares were trading 13.55% higher at $117.20 midday Wednesday.

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