NKE: Nike: Buy the Dip?

Athletic footwear, apparel, equipment, and accessories company Nike, Inc.’s (NKE) share price declined sharply after the company reported mixed financial results for its fiscal third quarter (ended February 28, 2021) on March 18. The stock is currently trading 7.3% below its 52-week high of $147.95. However, NKE’s sales in the Greater China market increased 51.3% year-over-year to $2.28 billion for the third quarter. The company’s digital sales also improved.

Furthermore, according to a Yahoo Finance article, Americans are buying more sneakers, using their recently received federal rescue checks. So, we think the current dip in NKE shares offers an ideal entry point.

Here are the factors that we think could influence NKE’s performance in the upcoming months:

High Profitability

NKE’s revenue from the North America market declined 10.4% year-over-year to $3.56 billion for its fiscal 2021 third quarter (ended February 28, 2021), due primarily to global container shortages and congestion at U.S. ports. However, these constraints are expected to dissipate with the reopening of the economy. Also, despite these short-term setbacks, NKE’s gross profit for the third quarter was $4.72 billion, up 5.5% year-over-year; its gross margin also increased 130 basis points to 45.6%.

In terms of its trailing-12-month gross profit margin, NKE’s 43.3% is higher than the industry average 33.3%. Its trailing-12-month return on common equity of 32.7% and its trailing-12-month return on total assets of 9.5% are also significantly higher than the respective industry averages.

Strengthening Position in the Digital Space

For its fiscal 2021 third quarter, the company’s NIKE Brand digital sales increased 59% year-over-year, with strong double-digit increases across all geographies. NKE also acquired the data-integration platform Datalogue in February to enable its consumer-led digital transformation. And on March 9, NKE announced senior leadership changes to accelerate its Consumer Direct Acceleration (CDA) strategy application.

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Favorable Analyst Estimates

Analysts expect NKE’s revenue to increase 76.5% year-over-year to $11.15 billion for the current quarter, ending May 31, 2021. Its EPS is expected to increase 96.9% in fiscal 2021, 26.7% in fiscal 2022 and at a rate of 34.6% per annum over the next five years.

Wall Street analysts expect the stock to hit $163.68 in the near term, which represents a potential upside of 19.5%. Also, of 35 Wall Street analysts that have rated the stock, 10 rated it a Strong Buy and 20 rated it a Buy. It has an average broker rating of 1.46.

POWR Ratings Show Promise

NKE has an overall B rating, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. NKE has a B grade for Quality, in sync with its higher-than-industry profitability ratios.

The stock also has a B grade for Growth. This is consistent with analysts’ expectations that its revenue and EPS will increase.

Click here to see the additional POWR Ratings for NKE (Value, Momentum, Stability and Sentiment).

NKE is ranked #18 of 33 stocks in the A-rated Athletics & Recreation industry.

Click here to access 20 other top-rated stocks in the same industry.

Bottom Line

NKE is currently trading 7.3% below its 52-week high. This is a perfect opportunity to buy the ‘Just Do It’ company’s shares we believe. It is already seeing huge sales in its China segment and digital channel. And as the global container shortage gradually declines, the company is expected to see huge sales in its North America segment also. Its numerous strategic acquisitions over the past years are also expected to boost its growth.

Click here to checkout our Retail Industry Report for 2021

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NKE shares were trading at $137.09 per share on Wednesday morning, down $0.03 (-0.02%). Year-to-date, NKE has declined -2.90%, versus a 4.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...