Nike Shows Strong Recovery in China, But Near-Term Outlook Cloudy

Nike Stock at a Glance

• Fair Value Estimate: $138
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Nike Earnings Update

Nike NKE posted 16% sales growth in greater China (15% of brand revenue) in its May-ended fiscal 2023 fourth quarter, allowing for 5% total sales growth, which eclipsed our forecast of 3%. We view this result as encouraging, given concerns about market share loss to local brands in China and the pace of the region’s economic recovery. However, Nike’s shares dipped 4% in postmarket trading, likely because of concerns about higher operating expenses that led to a small EPS miss ($0.66 versus our $0.69 forecast) and soft apparel demand.

We expect to lower our $138 per share fair value estimate by a low-single-digit rate on the cloudy near-term outlook, but view shares as attractive. We believe a premium valuation for Nike is justified, based on its potential to lift its operating margins to the mid-teens over the next 10 years from below 12% in fiscal 2023.

Nike’s 5% quarterly sales growth in North America (44% of brand sales) missed our 6% forecast, but its 3% sales growth in Europe, the Middle East, and Africa (27% of brand sales) matched our estimate. The firm’s wholesale sales in North America fell 3% as it’s worked to avoid excessive discounting. Nike projected mid-single-digit fiscal 2024 sales growth, which aligns with our 6% estimate.

Nike’s gross margins were subpar at 43.6% and 43.5% for the quarter and fiscal year, respectively. For fiscal 2024, the firm guided to a gross margin of about 45% as it benefits from lower input costs and better inventory control. Its inventory levels were high for much of the past year, but have improved. We believe the company can lift its gross margins to the high 40s in the long run.

Nike’s fourth-quarter operating costs came in at 34.1% of sales (20 basis points above our estimate) on higher marketing expenses. Moreover, it suggested that operating costs may remain elevated in fiscal 2024. While this may have a slightly negative impact on near-term EPS, we view Nike’s marketing as key support for its brand intangible asset (the source of our wide moat rating).