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What's Going On With Nike?

Earnings reports are always a spectacle. Companies finally pull the curtain back, unveiling how their businesses have fared behind closed doors.

Sometimes, the market’s reaction is less than desired.

Yesterday, NIKE NKE reported Q1 results, and despite posting a double-beat, shares underwent adverse price action.

NIKE designs, develops, and markets athletic footwear, apparel, equipment, and services for men, women, and children worldwide.

It’s been a harsh road for NIKE shares so far in 2022, down close to 50% and widely underperforming the general market. This is shown in the chart below.

Image Source: Zacks Investment Research

It raises a valid question: what didn’t investors like from the quarterly print? Let’s take a closer look.

Q1 Results

NIKE came out of the gate and reported EPS of $0.93, marginally beating out the Zacks Consensus EPS estimate of $0.91 by 2.2%.

It represented the company’s ninth consecutive quarter exceeding Zacks Consensus EPS Estimate and a 20% Y/Y downtick.

NIKE raked in roughly $12.7 billion throughout the quarter, good enough to exceed the Zacks Consensus Sales estimate of $12.3 billion by a respectable 3%, reflecting the fourth consecutive quarter of exceeding top-line estimates and a 4% Y/Y increase.

The company’s gross margin decreased to roughly 44%, negatively impacted by increased freight and logistics costs, lower margins across its NIKE Direct business, and unfavorable developments within net foreign currency exchange rates.

However, the company's overstocked inventory was the pinnacle of the report, and investors didn’t take it lightly.

NIKE’s inventories came in at $9.7 billion, reflecting a massive 44% Y/Y uptick.

Many retailers have felt the full pain of a supply chain crunch in 2022, and NIKE has been no exception – overstocked inventories were driven by elevated in-transit times from ongoing uncertainty within the supply chain.

Further, the company took somewhat drastic measures to address excess inventory in North America, such as NIKE Direct markdowns and even wholesale actions.

Still, Matthew Friend, EVP and CFO, remained optimistic, saying, “Our focus continues to be the consumer, as we take action to navigate near-term dynamics while expanding long-term structural benefits through our Consumer Direct Acceleration strategy.”

Time To Buy?

The company’s earnings outlook has fallen notably over the last 60 days and the previous seven. Analysts have been in full agreement.

Image Source: Zacks Investment Research

NIKE’s forward earnings multiple has fallen drastically amid the stretch of poor price action, with the 25.5X value sitting well beneath its five-year median of 32.4X.

Still, the value represents a 41% premium relative to its Zacks Consumer Discretionary Sector, and NKE sports a Style Score of a D for Value.

Image Source: Zacks Investment Research

However, the company has shown a commitment to shareholders, with five dividend payout increases over the last five years and a substantial 11% five-year annualized dividend growth rate.

NIKE’s annual dividend yield of 1.3% beats out its Zacks Sector average of 1.1% by a fair margin.

Image Source: Zacks Investment Research

Bottom Line

Following a double-beat in its quarterly print, Nike shares have tumbled, with sellers out in full force.

An overstocked inventory was the central spook of the release, with supply-chain volatility playing spoilsport.

However, Nike’s CFO remains optimistic, also saying, “Our strong start to FY23 highlights the depth and breadth of NIKE’s global portfolio, as we continue to manage through volatility.”

So, down nearly 50% YTD, is it time to buy NIKE NKE shares?

With ongoing supply chain volatility spawning dark fiscal clouds over the retailer, it’s challenging to paint a bullish near-term outlook, even with a solid dividend.

Recent negative earnings estimate revisions reflect this unfavorable near-term outlook.

Instead, it looks vital for investors to wait until the weather clears up and positive earnings estimate revisions start rolling in.

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