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Stock Analyst Update

Virus Hurts Nike's Results, Shares Undervalued

We expect to reduce our fair value estimate on the wide-moat brand because of COVID-19, but we believe it will come through the crisis better than most peers.

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Nike (NKE) reported third-quarter sales and earnings that missed our expectations due to coronavirus-related shutdowns of its stores in greater China during February. The firm reported a 5% drop in sales in the region, well below recent results and our (pre-virus) forecast of 14% growth. Nike’s shares, though, rallied about 10% in post-market trading (after a 15% jump in the regular session) as the damage was less than feared and sales were strong in most regions. However, as the virus has since spread, the outlook for Nike’s fourth quarter is very murky and no guidance was provided. We expect to reduce our fair value estimate on Nike of $106 by a high-single-digit percentage because of COVID-19 and the likelihood of a global economic slowdown. However, we believe that Nike has a uniquely powerful brand, the source of our wide-moat rating, allowing it to come through the crisis better than most peers.

Nike’s total sales growth of 5.1% in the quarter missed our 7.9% forecast due to the shortfall in greater China. Constant-currency growth of 13% in Europe, the Middle East, and Africa, or EMEA, was well above our 6% forecast as Nike continues to take share from narrow-moat Adidas and others. While Nike’s North America growth of 4% fell short of our 6% forecast, it would have roughly met our view if not for the sale of the Hurley brand and another unusual event. Meanwhile, Nike reports that sales trends in greater China were favorable until the virus hit in February. Nike was able to cut some costs in response to the crisis, and its selling, general, and administrative expense margin of 32.5% beat our forecast of 33.1%. Overall, EPS of $0.53 missed our forecast of $0.71 but included a $0.25 one-time charge related to a change in its distribution in South America and the benefit of unusually low tax rate (3.9% versus our forecast of 14%). Nike probably would have beat our expectations if not for COVID-19.

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

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