Nike’s Brand Value Holds Despite a Tough Near-Term Outlook; Shares Undervalued

Although Nike’s (NKE) sales performance in its (end-August) first quarter of fiscal 2023 eclipsed our forecast, this result was overshadowed by a disappointing near-term outlook due to the U.S. dollar’s strength and elevated inventories for the firm and peers in North America. Despite healthy demand, Nike has recently struggled to manage its product deliveries due to shipping woes, leading to a surplus of out-of-season inventory. Specifically, its quarter-end inventory jumped 44%. While markdowns will weigh on second-quarter margins, we believe the worst of Nike’s inventory issues has passed as shipping has normalized and sell-through appears solid. The firm reported strong back-to-school demand and double-digit sales growth thus far in September.

Nike’s share price dropped about 9% in postmarket trading on the report, but we anticipate only a low-single-digit percentage cut to our $133 fair value estimate, leaving shares attractive. In the first quarter, Nike recorded constant-currency sales growth in the teens in every region except greater China, which we view as evidence that its brand intangible asset, the source of our wide moat rating, remains intact. Moreover, we expect a relatively quick recovery as Nike appears to have a solid lineup of new products and should get a boost from the FIFA World Cup Qatar 2022 and other sporting events. We still believe Nike can reach gross and operating margins of 48% and 17%, respectively, in about five years as its direct-to-consumer, cost efficiency, and product enhancements take hold.

Nike’s first-quarter EPS matched our $0.93 forecast. While, due to discounting, its 44.3% gross margin missed our estimate by 110 basis points, its 4% sales growth beat our 1% expectation despite even more U.S. dollar appreciation than anticipated. Moreover, it second-quarter guidance of low-double-digit sales growth exceeds our 7% estimate, although its gross margin is likely to miss our 45.5% forecast by about 3 points as it clears inventory.