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Stock Analyst Update

E-Commerce, International Appeal Powers Nike in Q2

We believe the wide-moat firm is trading above its $107 fair value estimate.

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Nike’s (NKE) North America wholesale revenue fell 14% in the quarter due to the ongoing turmoil in physical retail and its strategy to pull its products from undifferentiated retailers. In the past few months, Nike has reportedly notified several U.S. retailers, including department stores Belk and Dillard’s, that it intends to cease shipments to them. Although this will be somewhat detrimental to U.S. sales, we view it as a wise strategy to protect the Nike brand and focus on stronger wholesale accounts and its own e-commerce.

Nike closed the quarter with $11.8 billion in cash and short-term investments, well above normal levels for the firm. Nike typically held cash and investments of about $5 billion prior to fiscal 2020. While the company has lifted its modest (annual yield under 1%) quarterly dividend by 12% to $0.275 per share, it has suspended share buybacks during the pandemic. We expect them to resume soon and model $2.0 billion in repurchases in this fiscal year. However, as we think the stock is somewhat overpriced, we think aggressive buybacks at current levels may be wasteful.

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David Swartz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.