Inflation eased for the tenth consecutive month in April but remains above the Fed’s 2% target. Meanwhile, consumer spending rose more than expected in April, indicating resilience in the economy and increasing the odds of another interest rate hike this month.

Popular footwear manufacturer NIKE, Inc. (NKE) surpassed Street estimates for revenue and EPS in the third quarter. The company’s EPS came 44.6% above the consensus estimate, while its revenue beat the estimate by 7.9%.

In this piece, I have discussed why waiting for a better entry point in NKE could be prudent.

NKE’s President and CEO John Donahoe said, “NIKE’s strong results in the third quarter offer continued proof of the success of our Consumer Direct Acceleration strategy. Fueled by compelling product innovation, deep relationships with consumers, and a digital advantage that fuels brand momentum, our proven playbook allows us to navigate volatility as we create value and drive long-term growth.”

NKE’s inventories rose 16% year-over-year to $8.9 billion, primarily driven by higher product input costs and elevated freight costs. Inventory has been a major issue for footwear giants like NKE and its competitor, adidas AG (ADDYY). NKE’s gross margin took a 330 basis-point hit, primarily due to higher promotional costs to liquidate the excess inventory.

The company expects its wholesale growth to moderate over the next few quarters to enable its retail partners to work through excess and early-arriving inventory. NKE expects its gross margin for fiscal 2023 to decline approximately 250 basis points, at the lower end of its previous guidance.

NKE’s stock has declined 11.4% in price year-to-date and 12.7% over the past year to close the last trading session at $103.63.

Here’s what could influence NKE’s performance in the upcoming months:

Mixed Financials

NKE’s revenues for the third quarter ended February 28, 2023, increased 14% year-over-year to $12.39 billion. Its gross profit increased 6% over the prior-year quarter to $5.37 billion. The company’s net income declined 11.2% year-over-year to $1.24 billion. Also, its EPS declined 9.2% year-over-year to $0.79.

Mixed Analyst Estimates

Analysts expect NKE’s EPS for fiscal 2023 is expected to decline 16.2% year-over-year to $3.22. Its revenue for the same year is expected to increase 9.1% year-over-year to $50.94 billion. Its EPS and revenue for fiscal 2024 are expected to increase 24.6% and 7.3% year-over-year to $4.02 and $54.63 billion, respectively.

Similarly, its EPS for the quarter ended May 31, 2023, is expected to decline 33.6% year-over-year to $0.66. Its revenue for the same quarter is expected to increase 2.8% year-over-year to $12.57 billion.

Stretched Valuation

In terms of forward EV/EBITDA, NKE’s 23.57x is 155.9% higher than the 9.21x industry average. Likewise, its 3.16x forward EV/S is 188.5% higher than the 1.10x industry average. Its 32.15x forward non-GAAP P/E is 139.8% higher than the 13.41x industry average.

High Profitability

In terms of the trailing-12-month gross profit margin, NKE’s 43.85% is 24.3% higher than the 35.27% industry average. Likewise, its 13.99% trailing-12-month EBITDA margin is 28.4% higher than the industry average of 10.90%. Furthermore, the stock’s 5.67% trailing-12-month levered FCF margin is 75.6% higher than the industry average of 3.23%.

POWR Ratings Reflect Uncertainty

NKE has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NKE has a C grade for Stability, in sync with its 1.11 beta.

It has a D grade for Value, consistent with its stretched valuation. Its high profitability justifies its B grade for Quality.

NKE is ranked #10 out of 37 stocks in the Athletics & Recreation industry. Click here to access NKE’s Growth, Momentum, and Sentiment ratings.

Bottom Line

NKE’s inventory remains above the company’s comfort level. The company is expected to see gross margin contraction for the year and a slowdown in growth during the final quarter of fiscal 2023. Still, it remains optimistic about its fiscal 2024 prospects due to the recovery in the Chinese markets, normalizing markdowns, channel mix, normalizing logistics costs, etc.

Given its mixed fundamentals and mixed analyst estimates, it could be wise to wait for a better entry point in the stock.

How Does NIKE, Inc. (NKE) Stack Up Against Its Peers?

NKE has an overall POWR Rating of C, equating to a Neutral rating. Check out these stocks from the Athletics & Recreation industry with an A (Strong Buy) or B (Buy) rating: Marine Products Corporation (MPX), MasterCraft Boat Holdings, Inc. (MCFT), and Brunswick Corporation (BC).

What To Do Next?

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NKE shares were trading at $106.56 per share on Friday morning, up $2.93 (+2.83%). Year-to-date, NKE has declined -8.67%, versus a 11.70% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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