Shares of athletic footwear and apparel giant Nike (NYSE: NKE) are down 31% year-to-date as investors continue to be wary of high inflation, supply chain woes and geopolitical tensions.
Nike navigated a tough business environment and delivered better-than-anticipated results for Q3 FY22 (ended February 28, 2022), with revenue growing 5% to $10.9 billion fueled by strong demand, especially in North America. Despite higher revenue, Nike’s Q3 FY22 EPS declined 3.3% to $0.87 due to a rise in digital marketing expenses, technology investments and increased taxes.
Nike’s sales from Greater China, its third-largest market behind North America and Europe, Middle East and Africa, declined by 5% in Q3 FY22. COVID-19 restrictions, supply chain constraints, and a preference for local brands have been impacting Nike’s sales in the region. However, business in Greater China improved when compared to the fiscal second quarter.
For Q4 FY22, Nike expects its North American segment revenue to decline due to tough year-over-year comparisons, while it expects to see continued sequential improvement in Greater China.
On the Right Track for Future Growth
Nike has been reducing its exposure to wholesale accounts and is enhancing its Nike Direct business, which includes company-owned retail stores and digital channels. This move is expected to improve the company’s margin over the long-term.
In Q3 FY22, Nike Direct’s sales were up 15%, with digital revenue rising 19%, backed by strong demand via the Nike App. The company’s app ecosystem includes the Nike App, SNKRS App, and other activity platforms.
Further, Nike has a strong brand awareness, which it continues to bolster it through continued marketing investments, innovation, and collaborations with popular and high-profile athletes, including Michael Jordan, Serena Williams, LeBron James, Rafael Nadal, and Cristiano Ronaldo.
Wall Street’s Take
Following a meeting with Nike’s management, Jefferies analyst Randal Konik reiterated a Buy rating with a price target of $185, as he felt “more confident in NKE’s business model and long-term trajectory.”
Konik noted that Nike’s management expects product innovation and marketing investments to further strengthen the company’s brand. The analyst believes that Nike’s digital transformation and focus on Nike Direct will “drive repurchase activity and engagement with the brand, and this, in turn, should lift margins over the long-term.”
Turning to other analysts on the Street, Nike scores a Strong Buy consensus rating based on 18 Buys and six Holds. The average Nike price target of $166.09 suggests 45.07% upside potential from current levels.
While Nike might continue to be under pressure over the near-term due to the impact of macro headwinds on discretionary spending, several analysts continue to be bullish about the company’s long-term prospects. Factors relating to its impressive brand recognition, continued innovation, strong fundamentals and opportunities in new avenues like metaverse are supporting Nike’s positive narrative.
Currently, TipRanks data shows that financial blogger opinions are 81% Bullish on Nike, compared to a sector average of 66%.
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