Nike earnings: Not winning now, but early stages of turnaround plan encouraging
We continue to view Nike stock as undervalued.
Mentioned: Nike Inc Class B (NKE)
Morningstar’s Metrics for Nike
- Fair Value Estimate: $112.00
- Morningstar Rating: ★★★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
What we thought of Nike’s earnings
Although Nike NKE reported large declines in sales and earnings in its fiscal third quarter, the results were better than expected, and new CEO Elliott Hill outlined a solid plan to get the firm back on track. His “win now” plan includes actions to grow through wholesale partnerships, use e-commerce as a premium channel, increase product innovation, and strengthen ties to sports.
The strategy is being implemented in all of Nike’s key regions. It will require some significant inventory cleanup and is unlikely to pay immediate dividends in a tough global sportswear market, but we already anticipated this in our model. Thus, we do not expect to make any material change to our $112 fair value estimate and think there is an opportunity for patient investors. After an initial spike after the earnings report, Nike’s shares fell 5% during March 20 postmarket trading, likely due to its dim near-term outlook.
Nike’s sales decline of 9% in the quarter was slightly better than our estimate for an 11% fall. Nike brand sales in North America (45% of the total) slid 4%, but Greater China sales (16% of the total) missed our 9% decline projection by plummeting 17%. Nike has had sales declines in the latter region in three of the last four years, but is aggressively liquidating inventory and implementing its other win now plans to improve customer traffic in its thousands of franchised Chinese stores. We project a return to double-digit percentage sales growth in Greater China in fiscal 2027.
Despite its current challenges, Nike continues to manage its costs well and outperform on profitability. Its 7% operating margin in the quarter was poor by its usual standards, but beat our estimate by 260 basis points, nonetheless. Coupled with an unusually low tax rate, its EPS of $0.54 was $0.25 above our estimate. We think Nike can build annual operating margins around 16% in the long run.
