Nike Earnings: Near-Term Outlook Dims, but Margin Improvement Still Likely

Key Morningstar Metrics for Nike

• Fair Value Estimate: $136.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Nike’s Earnings

Nike’s NKE earnings in its fiscal 2024 second quarter surpassed our forecast, but this was overshadowed by a disappointing sales outlook for the second half, especially in greater China and in Europe, the Middle East, and Africa, or EMEA. Specifically, the firm guided to 1% sales growth for the full fiscal year, below our 4% estimate.

Moreover, Nike announced a new restructuring plan that will bring $400 million-$450 million in one-time charges. This plan, which includes layoffs, increased automation, and product eliminations, is expected to generate as much as $2 billion in cost savings over the next three years to fund efficiency, speed, and product development efforts.

Initial investor reaction was negative, with the market sending Nike’s stock lower. While we expect to reduce our short-term sales estimates to reflect the new outlook, the impact on profitability (excluding the special charges) should be limited. In the long run, we still expect the company can generate mid-single-digit annual sales growth and build to high-teens operating margins. Thus, we do not expect to make any material change to our $136 fair value estimate, leaving the stock attractive.

Nike’s 1% sales growth in the quarter aligned with our estimate, even as reported sales in its largest regions—North America (42% of total sales), EMEA (27% of sales), and greater China (14% of sales)—were slightly below expectations. Like many peers, Nike faced weak retail demand and wholesale orders (sales down 2%). Even so, its profitability was strong, as its 14.2% EBIT margin in the quarter beat our estimate by about 3 percentage points, due to operating cost control and lower freight costs and price increases, which allowed the firm’s gross margin to increase 170 basis points to 44.6%.

We expect to adjust our Uncertainty Rating to Medium from High, based on the stabilization of Nike’s business after the pandemic and our quantitative model.