Apparel and footwear giant Nike (NYSE:NKE) is scheduled to announce its results for the second quarter of Fiscal 2023 after the market closes on December 20. Retailers have been under pressure due to the impact of high inflation on consumer spending, increased costs, and supply chain issues. Nike’s efforts to reduce its elevated inventory levels are expected to weigh on its Q2 FY23 profitability.
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Expectations from Nike’s Q2 Results
Nike topped analysts’ expectations for Q1 FY23, but investors were spooked by the 44% rise in the company’s inventory levels amid supply chain woes. For Q2, Nike guided revenue growth in the low double digits, despite an estimated 900 basis points of currency headwinds.
The company projects 350 to 400 basis points of gross margin contraction in Q2, reflecting its decision to aggressively sell out-of-season products at discounts to reduce the high inventory levels.
Analysts expect Nike’s adjusted EPS to decline about 22% year-to-over to $0.65 due to markdowns and higher costs. Revenue is expected to rise nearly 11% to $12.6 billion.
Is Nike a Buy, Sell, or Hold?
Credit Suisse analyst Michael Binetti believes that Nike’s two most important businesses are “at or past their trough,” and EPS revisions are “more likely to the upside from here.” However, the analyst feels that Nike needs to reassure investors that significant inventories won’t pressure its U.S. revenues in the second half of FY23.
Binetti concludes that Nike is a “must-own discretionary stock,” given its exposure to the powerful consumer market – China, which is expected to rebound over the next year following its reopening. In line with his investment thesis, Binetti raised his price target for Nike stock to $122 from $110 and reiterated a Buy rating.
The Street’s Moderate Buy consensus rating for Nike stock is based on 17 Buys, nine Holds, and one Sell. The average Nike stock price target of $117.36 implies 10.8% upside potential from current levels.
Shares have declined 36% year-to-date. The stock is currently trading at a forward Price/Earnings (P/E) multiple of 34.8, which is at 4.3% discount to its five-year average.
Conclusion
Investors will mainly look at Nike’s efforts to address its excess inventory levels and management’s commentary about expectations from the second half of FY23. Furthermore, another key aspect to watch would be the company’s performance in China, which has been disrupted by COVID-led disruptions.
