Nike Earnings: Brand Investments Look Promising, but Near-Term Outlook Is Dim

Key Morningstar Metrics for Nike

• Fair Value Estimate: $136.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Nike’s Earnings

Nike NKE matched our forecast with flat sales growth in its fiscal third quarter (ending February) for 2024. However, this was overshadowed by the firm’s guidance for a low-single-digit-percentage sales decline in the first half of fiscal 2025. This suggests subpar consumer demand for sportswear in North America, China, and other key markets is likely to persist longer than many industry participants have anticipated. As such, our forecast for Nike to rebound to 7% sales growth in fiscal 2025 is likely out of reach, and we expect to lower our $136 fair value estimate by a mid-single-digit percentage.

Even so, we think investments in products, marketing, and its supply chain will allow the company to regain lost share and outpace market growth when sportswear demand improves. Historically, investing in Nike’s shares in difficult periods has been a successful strategy.

Nike’s sales were close to our expectations for most segments during the quarter. North American sales (41% of the total) rose 3%, slightly above our 2% estimate, as it reported lower markdowns in the holiday period than many competitors. However, Nike’s outlook suggests this market will likely remain challenging. Moreover, sales fell 3% in Europe, the Middle East, and Africa (25% of the total) due to weaker economic conditions. Nike plans to introduce new products around the summer 2024 Paris Olympics that should eventually drive an improvement in sales across all regions.

Nike’s 10.9% EBIT margin in the quarter outpaced our estimate by 150 basis points, as expense controls were better than we expected. Moreover, although the firm incurred $340 million in restructuring charges, this was less than the $425 million assumed in our forecast. Due to this margin outperformance, earnings per share of $0.77 beat our estimate by $0.14. Nike’s fourth-quarter outlook suggests sales growth below our 3% estimate, but also that cost controls may offset the impact on the bottom line.