Why Some Analysts Are Bullish on Nike’s Long-Term Prospects — Despite Inventory Problems

Shoshy Ciment
·3 min read

Despite Nike’s inventory headwinds in North America — Swoosh shares were down more than 12% today — some analysts are bullish on the stock in the long-term.

“Overall, Nike is on a solid trajectory,” said managing director of GlobalData Neil Saunders in a comment following the company’s earnings report on Thursday evening. “While not immune to economic challenges, the company is proving it can successfully navigate shifts in demand.”

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The Beaverton, Ore.-based company reported Q1 revenue of $12.7 billion, up 4% compared to the prior year. EPS was $0.93 and net income was $1.5 billion, down 22% from last year.

Gross margin, or profit, decreased 220 basis points to 44.3%, which the company attributed to higher freight and logistics costs, more markdowns in the Nike Direct business and headwinds in net foreign currency exchange rates. The main reason for the declines? Attempts to liquidate excess inventory in North America.

Like other brands and retailers, Nike faced higher than usual inventories — up 44% in Q1 — partially due to late orders that were impacted by a volatile supply chain. However, Nike CFO Matt Friend said in a Thursday call with investors that he believes total inventory peaked in Q1 and he expects improvements through the year.

While the inventory issue was a key theme in the earnings report, analysts appeared overall upbeat for the potential for recovery through the rest of the year.

As BMO analyst Simeon Siegel put it, “Nike looks increasingly like other over-inventoried promo-chasing retailers.” But, he added, he sees the potential for “long term competitive advantage.”

Baird analyst Jonathan Komp described Nike’s inventory problems as “inexcusable,” especially for an “industry bellwether” like the Swoosh. However, he noted that the company’s measures to clear inventory via markdowns and adjusted orders for the second half of the year could ultimately ease the situation.

Nike noted on Thursday that demand has remained strong, despite soaring prices due to inflation. According to Saunders, Nike’s brand heat and cool-factor will be a key factor in its ability to “hold its own more than other brands.”

This sentiment was shared by Cowen analyst John Kernan, who noted that Nike still lives in a “point of strength” compared to its athletic peers, given widespread headwinds across the industry. He added that he expects to see guidance reductions and EPS downgrades across similar stocks such as Adidas, Under Armour, Puma and Skechers.

This strength in demand and compelling product was evident in the success of Nike’s SKNRS app, which is used to drop limited quantities of high-heat product. In fiscal Q1, 3.8 million members competed for the Travis Scott Air Jordan 1 in July, which marked the highest ever number of entries for a single shoe on the platform.

“The SNKRS app continues to fuel energy to our growing audience of high-value members,” Nike CEO John Donahoe said in a call with investors.