Nike Inc (NYSE:NKE) was a shot across the bow for anyone who thought everything was destined to work out a bit better than expected. But it still has the obvious “out” – hey, there’s a pandemic! The company missed estimates by a wide margin as most of its stores were closed down during the quarter. So, anything goes, and this can’t really be all that surprising. The one thing you can be sure of right now is this: no expectations come with strong conviction. No one knows, and everyone knows that.
In any case, it will take a couple of quarters to tailor inventory levels to the context, but results also showed the underlying strength in 80% ecommerce growth driving a 30% mix factor, which will now target a 50% mix while stores are growing double digits in North America since mid-May.
We would also note that estimates came down for FY21. But this remains the premier athletic apparel/marketing company on planet Earth. That makes it a solid long-term bet despite the rich valuation and difficult context right now.
Nike Inc (NYSE:NKE) trumpets itself as a company that designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. The company offers NIKE brand products in six categories, including running, NIKE basketball, the Jordan brand, football, training, and sportswear.
It also markets products designed for kids, as well as for other athletic and recreational uses, such as American football, baseball, cricket, golf, lacrosse, skateboarding, tennis, volleyball, walking, wrestling, and other outdoor activities; and apparel with licensed college and professional team and league logos, as well as sells sports apparel.
In addition, the company sells a line of performance equipment and accessories comprising bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, and other equipment for sports activities; and various plastic products to other manufacturers. Further, it provides athletic and casual footwear, apparel, and accessories under the Jumpman trademark; casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks; and action sports and youth lifestyle apparel and accessories under the Hurley trademark.
Additionally, the company licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. It sells its products to footwear stores; sporting goods stores; athletic specialty stores; department stores; skate, tennis, and golf shops; and other retail accounts through NIKE-owned retail stores, digital platforms, independent distributors, licensees, and sales representatives.
While this is a clear factor, it has been incorporated into a trading tape characterized by a pretty dominant offer, which hasn't been the type of action NKE shareholders really want to see. In total, over the past five days, shares of the stock have dropped by roughly -2% on above average trading volume. All in all, not a particularly friendly tape, but one that may ultimately present some new opportunities.
Our NKE Earnings Summary:
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Reports Q4 (May) loss of $(0.51) per share, $0.55 worse than the S&P Capital IQ Consensus of $0.04; revenues fell 38.0% year/year to $6.31 bln vs the $7.26 bln S&P Capital IQ Consensus.
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Q4 results were significantly impacted by physical store closures across North America, EMEA and APLA, where 90% of NIKE-owned stores were closed for roughly eight weeks. Wholesale partners largely followed the same pattern and as a result, product shipments to wholesale customers were down nearly 50%, resulting in lower total revenue and higher inventory.
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Digital sales increased 75% yr/yr, with strong double-digit increases across all geographies and was approximately 30% of total revenue.
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As of today, approximately 90% of NIKE-owned stores are open across the globe. Retail traffic continues to improve week-over-week with higher conversion rates as compared to the prior year. In Greater China, nearly 100% of NIKE-owned stores are open. In North America, EMEA and APLA, approximately 90% of physical owned stores were closed during Q4 with stores gradually reopening at different paces in each country beginning in mid-May.
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Today, roughly 85% of NIKE-owned stores are open in North America and about 90% in EMEA, with approximately 65% open in APLA or operating under reduced hours.
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Note: NKE typically guides on the call although it has suspended guidance for now, so we'll see if that changes.
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Co provides general guidance on earnings call. Co says it generally expects to see sequential quarterly improvement in its financial results as Retail re-opens and each market normalizes supply and demand.
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Co expects revenue in the first half of the fiscal year to be below prior-year levels but less of a decline than experienced in Q4 (May) as co continues to reopen stores and fuel its digital business.
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Co expects revenue in the second half to be up significantly on a yr/yr basis with a healthy marketplace and normalizing full-price sell-through across channels.
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For the full fiscal year, co expects revenue to be flat-to-up versus prior-year and co expects it will have greater clarity 90 days from now.
Our NKE Research and Conference Call Notes:
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Bernstein raises their NKE tgt to $115 from $101; analyst Jamie Merriman said, "Nike's Q4 2020 EPS of -$0.51 was below our estimate of +$0.13 and consensus of +$0.10, driven by lower revenue and gross margin as a result of the impacts of the COVID-19 pandemic, partially offset by lower selling and administrative expenses. Despite the miss, there were positive takeaways: 1) digital revenue grew +79% CCY, with triple-digit growth in May and continuing for the first three weeks of June, even as stores reopened, 2) China returned to growth in the quarter +1% CCY, and grew double digits in May, and 3) sales of Nike branded product returned to growth at retail in North America and Europe in May. COVID-19 challenges still remain ahead. Specifically, inventory is elevated, up 31% YoY as of fiscal year end. In response to the pandemic, Nike began altering near-term buying plans in mid-March, and reduced purchase orders for the fall and holiday seasons by 30% on a unit basis. We expect weakness in the wholesale channel to continue in 1Q21 as Nike partners work through inventory, and despite the return to growth at retail for Nike brand in NA and EMEA by the end of fiscal 2020, Nike will not experience this benefit on a reported basis and markdowns will drag on gross margin until H2 2021 when inventory has been right-sized."
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Guggenheim analyst Robert Drbul said, "The company introduced the Consumer Direct Acceleration Strategy which aims to increase its digital penetration revenue goal to 50% by FY23 (up from 30% expected in FY21). The company also announced an updated consumer construct realigned by men's, women's, and kids and plans to make continued digital ecosystem investments combined with plans to open 150-200 small footprint, digitally-enabled new stores. Importantly, NKE experienced a return to positive revenue growth in China this quarter - $NKE remain BUY-rated with a $115 PT and are reducing our FY21 estimate to $2.50 from $3.50 and establishing a FY22 EPS of $3.00."
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BofA/Merrill's Robert Ohmes added, "By category, we believe growth was led by Jordan (incl. AJ1& AJ5) helped by "The Last Dance Documentary" (Jordan increased +16% in F20). Gross margin of 37.3% (vs. our 43.5%) decreased 820bps which included 500bps of negative impact from order cancellations, increased inventory obsolescence reserves, and adverse rate impact of fixed supply chain costs as well as 250bps impact from higher promos & 70 bps of FX headwinds. Our PO remains $110 based on 36-37X our unchanged F22E EPS of $3.00 and we reiterate Buy given NKE's expected global recovery by F2H."
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UBS raises their NKE tgt to $127 from $122; analyst Jay Sole commented, "Nike's 4Q20 earnings report suggested the negative impact from COVID-19 will end sooner than previously thought and the long-term story remains firmly intact. As a result, we raise our FY23 EPS estimate ~4% and our PT by the same amount. We forecast a 26% 5-yr. EPS CAGR and believe this more than justifies the stock's current ~30x FY2 P/E. Four main factors will drive Nike's growth: 1) Strong athletic wear category tailwinds which have been boosted by the pandemic; 2) The industry's strongest brand; 3) Digital commerce excellence; and 4) Product innovation. We see 25% PT upside and an almost 2.5:1 upside/downside skew."
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Telsey's Cristina Fernández stated, "Beyond the near-term challenges presented by COVID-19, Nike outlined a new strategy to accelerate its digital business with a goal of digital representing 50% of Nike/partner sales, up from its prior goal of 30%, which it expects to achieve two years early in FY21. This trend toward digital should continue to drive sales and operating margin expansion over the next several years. As such, we see further upside for the stock over the next 12 months driven by relatively strong demand for athletic apparel and footwear, a proven execution track record, and a steady stream of product innovation. We maintain our Outperform rating and 12-month price target of $110, based on applying a P/E multiple of ~35x to our FY22 EPS estimate of $3.13."
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Other analyst target moves: Pivotal Research Group raises their NKE tgt to $118 from $115; Barclays raises their NKE tgt to $118 from $92; Goldman raises their NKE tgt to $110 from $96; Wells Fargo raises their NKE tgt to $110 from $99; Credit Suisse lowers their NKE tgt to $111 from $114.
