Nike Earnings: Brand Strength Shines Despite North America Weakness

Key Morningstar Metrics for Nike

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

Nike Earnings Update

Nike’s NKE profit margins eclipsed our estimates in its August-ended fiscal 2024 first quarter, despite a tough demand environment in North America and negative currency effects. We believe the firm’s competitive advantages, including its innovative products, robust marketing, and global focus, let it outperform competitors.

Although second-quarter sales growth is likely to be negligible, we do not think Nike will need to resort to heavy discounting, as its inventory was down 10% at the end of the first quarter. Nike’s shares edged up by 8% during Sept. 28 postmarket trading, but we still rate them as undervalued in relation to our fair value estimate of $136, which we do not expect to revise materially. Nike’s shares have rarely traded at such a sizable discount to our valuation over the past decade.

In the quarter, the company’s 2% sales growth matched our forecast even though wholesale sales in North America fell 8%. The firm recorded sales increases of 5% in Greater China (13% of sales) and 8% in Europe, the Middle East, and Africa (28% of sales), versus our estimates of 2% growth for both regions. On a constant-currency basis, Greater China sales rose 12%, which we rate as a solid result, given the slow economic recovery in the region. We model compound average annual sales growth of 13% for Nike in Greater China in the long run, as investments allow the firm to maintain its premium positioning and athletics interest rises in the region.

Nike’s 44.2% gross margin and 12.4% operating margin surpassed our forecast by 70 and 240 basis points, respectively. Its margins likely benefited from the mix shift, as well as successful price increases and lower shipping costs. Although there is uncertainty as to its ultimate impact, we think Nike’s transition from wholesale in favor of its own channels will bring about steady margin increases, with gross and operating margins reaching about 49% and 18%, respectively, in 10 years.