Nike reports earnings after the market closes Thursday. Whether the company meets projections is a hotly debated topic up and down Wall Street.
Analysts are projecting Nike (ticker: NKE) will post earnings of 76 cents on $13 billion in revenue for its fiscal first quarter. But with demand for athletic wear slowing, investors are split on what to expect when the results hit the wire.
“NKE is one of the biggest battleground stocks in our coverage,” wrote Rick Patel, analyst at Raymond James, in a Tuesday note to clients. Patel has an Outperform rating on the stock.
Bearish investors are concerned that a slowdown in consumer spending across North America will weigh on the company’s results. Foot Locker (FL) and Dick’s Sporting Goods (DKS) both cut their full-year outlooks following lackluster second-quarter results, citing cautious consumers. Back-to-school sneaker sales, which initially got off to a strong start, have since fallen flat.
“Our consumer survey results indicate that U.S. consumers are likely to reduce spending ahead, with apparel and footwear being the most likely areas of pullback,” wrote Jefferies analyst Randal Konik in a note downgrading Nike stock to Hold from Buy Monday.
It doesn’t help that the economy of one of Nike’s biggest growth markets—China—is still sputtering. The macroeconomic headwinds in both of the company’s largest markets could lead Nike’s management team to lower their fiscal-second-quarter guidance, added Citi’s Paul Lejuez. Lejuez has a Neutral rating on the stock.
The bulls, such as Guggenheim’s Robert Drbul, argue the stock price already reflects these concerns. Nike shares are off 24% this year, well below the S&P 500 ‘s 11% gain.
“At current levels, we believe the risk-reward ratio in the shares remains
favorable,” Drbul wrote, adding that the stock was primed for a rally. Nike is a Barron’s stock pick.
Drbul noted that the company has recently improved its inventory levels after several quarters of having too much in stock, which positions it well to navigate economic uncertainty.
Telsey Advisory Group’s Cristina Fernandez agrees. The company seems to be in a “better inventory position than other brands,” she says. It will, however, likely still have to discount some products through the holiday season to keep up with competitors who may still have overburdened inventories.
Moreover, the Nike brand is still strong, she adds, with many wholesale partners, including Foot Locker, recently commenting that Nike shoes were selling well. Fernandez has an Outperform rating on the stock.
A slate of highly anticipated sneaker drops could extend that sales momentum through December, Drbul wrote, such as the new Jordan and Kobe models.
The company could also benefit from fewer factors pressuring gross margins, Patel, the Raymond James analyst, pointed out. High freight costs and inventory levels, topped off by lockdowns in China, dragged margins lower in recent quarters. But these challenges have since eased and turned to tailwinds for the company, he added.
“We think NKE is locked and loaded to show better earnings power when margin pressure eases,” Patel wrote.